**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

**FORM 10-Q**

**(MarkOne)**
| x                                                      |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|
|                                                   |   |                                                                                                    |
| **For  the quarterly period ended September 30, 2006** |
|                                                   |   |                                                                                                    |
| **or**                                                 |
|                                                   |   |                                                                                                    |
| o                                                      |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from              to**

 

**CommissionFile Number 000-50405**

**ACUSPHERE,INC.**(Exact name of registrant as specified in its charter)
| **Delaware**                                                     |   | **04-3208947**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation  or organization) |   | (IRS Employer  Identification No.) |
|                                                             |   |                               |
| **500  Arsenal Street**                                          |   |                               |
| **Watertown,  Massachusetts**                                    |   | **02472**                          |
| (Address of principal  executive offices)                        |   | (Zip Code)                         |

 

Registrant’sTelephone Number, Including Area Code: **(617)648-8800**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large acceleratedfiler o           Accelerated filer o           Non-accelerated filer x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b 2 of theExchange Act). Yes o  No x

As of November 8, 2006there were 28,830,922 shares of the registrant’s common stock, $.01 par valueper share, outstanding.

----

 

**ACUSPHERE,INC.**

**Form 10-QFor the Quarterly Period Ended September 30, 2006**

**CONTENTS**

 
| PART I: FINANCIAL  INFORMATION                                                                       | 3      |
|------------------------------------------------------------------------------------------------------|--------|
| Item  1. Consolidated Financial Statements                                                           | 3      |
| Condensed Consolidated Balance Sheets:                                                               | 3      |
| September 30, 2006 (Unaudited) and December 31,  2005                                                |   |
| Condensed Consolidated  Statements of Operations (Unaudited):                                        | 4      |
| Three and Nine Months ended  September 30, 2006 and 2005                                             |   |
| Condensed Consolidated  Statements of Cash Flows (Unaudited):                                        | 5      |
| Nine Months ended September  30, 2006 and 2005                                                       |   |
| Notes  to Condensed Consolidated Financial Statements (Unaudited)                                    | 6      |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 15     |
| Item 3.  Quantitative and Qualitative Disclosure about Market Risk                                   | 28     |
| Item 4. Controls  and Procedures                                                                     | 29     |
| PART II: OTHER  INFORMATION                                                                          | 30     |
| Item  1. Legal Proceedings                                                                           | 30     |
| Item  1A. Risk Factors                                                                               | 30     |
| Item 2. Unregistered  Sales of Equity Securities and Use of Proceeds                                 | 44     |
| Item 3. Defaults  Upon Senior Securities                                                             | 44     |
| Item 4. Submission  of Matters to a Vote of Security Holders                                         | 45     |
| Item  5. Other Information                                                                           | 45     |
| Item 6. Exhibits                                                                                     | 45     |
| Signature                                                                                            | 46     |

 

2

----

 

**PART I: FINANCIAL INFORMATION**

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

**ACUSPHERE, INC. AND SUBSIDIARIES** 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(unaudited, in thousands except share data)**

 
|                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **As of**               | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                                                                                                                                                |       |                         |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                                                                                                                     |       | $                            | 47,621     |   | $ | 51,112 |   |
| Other current  assets                                                                                                                                                                                                                                                                                                                                                                                          |       | 752                          |       | 1,142 |   |
| Total current  assets                                                                                                                                                                                                                                                                                                                                                                                          |       | 48,373                       |       | 52,254 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                           |       |                         |       |   |   |
| PROPERTY AND EQUIPMENT,  at cost:                                                                                                                                                                                                                                                                                                                                                                              |       |                         |       |   |   |
| Property and  equipment                                                                                                                                                                                                                                                                                                                                                                                        |       | 54,824                       |       | 53,726 |   |
| Less accumulated  depreciation and amortization                                                                                                                                                                                                                                                                                                                                                                |       | 19,576                       |       | 11,886 |   |
| Property and  equipment, net                                                                                                                                                                                                                                                                                                                                                                                   |       | 35,248                       |       | 41,840 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                           |       |                         |       |   |   |
| OTHER ASSETS                                                                                                                                                                                                                                                                                                                                                                                                   |       | 1,859                        |       | 1,745 |   |
| TOTAL ASSETS                                                                                                                                                                                                                                                                                                                                                                                                   |       | $                            | 85,480     |   | $ | 95,839 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                           |       |                         |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                                                                                                 |       |                         |       |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                                                                                                                           |       |                         |       |   |   |
| Current portion  of long-term obligations                                                                                                                                                                                                                                                                                                                                                                      |       | $                            | 12,333     |   | $ | 6,727 |   |
| Current portion  of deferred revenue                                                                                                                                                                                                                                                                                                                                                                           |       | 2,667                        |       | 3,429 |   |
| Derivative  liability                                                                                                                                                                                                                                                                                                                                                                                          |       | 348                          |       | 1,078 |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                                                               |       | 2,693                        |       | 3,180 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                                                                                                               |       | 4,810                        |       | 6,829 |   |
| Total current  liabilities                                                                                                                                                                                                                                                                                                                                                                                     |       | 22,851                       |       | 21,243 |   |
| LONG-TERM LIABILITIES:                                                                                                                                                                                                                                                                                                                                                                                         |       |                         |       |   |   |
| Long-term  obligations, net of current portion                                                                                                                                                                                                                                                                                                                                                                 |       | 10,741                       |       | 14,601 |   |
| Deferred  revenue, net of current portion                                                                                                                                                                                                                                                                                                                                                                      |       | 5,333                        |       | 2,578 |   |
| Total long-term  liabilities                                                                                                                                                                                                                                                                                                                                                                                   |       | 16,074                       |       | 17,179 |   |
| COMMITMENTS                                                                                                                                                                                                                                                                                                                                                                                                    |       |                         |       |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                                                                                                                                                                                                     |       |                         |       |   |   |
| Preferred stock,  $0.01 par value per share  Authorized - 5,000,000 shares as of September 30, 2006 and December 31, 2005;  Designated 6.5% convertible exchangeable - 1,000,000 shares as of September  30, 2006 and December 31, 2005; issued and outstanding 730,000 and  740,000 shares as of September 30, 2006 and December 31, 2005  (liquidation value $36,500,000 as of September 30, 2006) |       | 7                            |       | 7 |   |
| Common stock,  $0.01 par value per share  Authorized, 98,500,000 shares as of September 30, 2006 and December 31, 2005;  issued and outstanding 28,825,718 shares as of September 30, 2006 and  22,870,559 as of December 31, 2005                                                                                                                                                                        |       | 288                          |       | 229 |   |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                                                                                    |       | 315,483                      |       | 277,592 |   |
| Deferred  stock-based compensation                                                                                                                                                                                                                                                                                                                                                                             |       | (99                          | )          | (359 | ) |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                                                           |       | (269,124                     | )          | (220,052 | ) |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                               |       | 46,555                       |       | 57,417 |   |
| TOTAL                                                                                                                                                                                                                                                                                                                                                                                                          |       | $                            | 85,480     |   | $ | 95,839 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

3

----

 

**ACUSPHERE, INC. AND SUBSIDIARIES**

 

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited, in thousands except per share data)**

 
|                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                  | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| COLLABORATION REVENUE                                       |       | $                                | 12         |                            | $          | 857 |   | $ | 1,115 |   | $ | 2,571 |   |
| OPERATING EXPENSES:                                         |       |                             |       |                            |       |   |   |   |   |
| Research and  development                                   |       | 9,993                            |       | 8,856                           |       | 42,507 |   | 31,761 |   |
| General and  administrative                                 |       | 2,943                            |       | 1,747                           |       | 8,537 |   | 5,608 |   |
| Total operating  expenses                                   |       | 12,936                           |       | 10,603                          |       | 51,044 |   | 37,369 |   |
| Interest income                                             |       | 703                              |       | 459                             |       | 1,937 |   | 1,290 |   |
| Interest expense                                            |       | (578                             | )          | (404                            | )          | (1,713 | ) | (886 | ) |
| Change in valuation of  derivative                          |       | 57                               |       | (20                             | )          | 633 |   | 1,368 |   |
| NET LOSS                                                    |       | $                                | (12,742    | )                               | $          | (9,711 | ) | $ | (49,072 | ) | $ | (33,026 | ) |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Dividends on preferred  stock                               |       | (593                             | )          | (731                            | )          | (1,787 | ) | (1,763 | ) |
| NET LOSS AVAILABLE TO  COMMON STOCKHOLDERS                  |       | $                                | (13,335    | )                               | $          | (10,442 | ) | $ | (50,859 | ) | $ | (34,789 | ) |
| NET LOSS AVAILABLE TO  COMMON STOCKHOLDERS PER SHARE – |       |                             |       |                            |       |   |   |   |   |
| Basic and diluted                                           |       | $                                | (0.46      | )                               | $          | (0.58 | ) | $ | (1.91 | ) | $ | (1.95 | ) |
| WEIGHTED-AVERAGE SHARES  OUTSTANDING –                 |       |                             |       |                            |       |   |   |   |   |
| Basic and diluted                                           |       | 28,819                           |       | 17,915                          |       | 26,571 |   | 17,852 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

4

----

 

**ACUSPHERE, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited, in thousands)**

 
| ** **                                                                   | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **September 30,**          | ** ** | **September 30,** | ** ** |
| ** **                                                                   | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |       |                            |       |   |   |
| Net loss                                                                     |       | $                               | (49,072    | ) | $ | (33,026 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                            |       |   |   |
| Stock-based  compensation expense                                            |       | 2,044                           |       | 464 |   |
| Depreciation and  amortization                                               |       | 7,690                           |       | 1,838 |   |
| Write-off of  intellectual property acquisition cost                         |       | 1,492                           |       | 5,218 |   |
| Noncash interest  expense                                                    |       | 536                             |       | 510 |   |
| Noncash rent  expense                                                        |       | 52                              |       | 383 |   |
| Noncash  amortization of deferred revenue                                    |       | (857                            | )          | (2,571 | ) |
| Noncash  amortization of fee and warrants to financial advisor               |       | 67                              |       | 202 |   |
| Change in  valuation of derivative                                           |       | (633                            | )          | (1,368 | ) |
| Changes in  operating assets and liabilities:                                |       |                            |       |   |   |
| Deferred revenue                                                             |       | 2,098                           |       | 3,000 |   |
| Other current  assets                                                        |       | 999                             |       | 1,036 |   |
| Accounts payable                                                             |       | (634                            | )          | (2,245 | ) |
| Accrued expenses                                                             |       | (2,081                          | )          | 770 |   |
| Net cash used in  operating activities                                       |       | (38,299                         | )          | (25,788 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |       |                            |       |   |   |
| Purchases of  property and equipment                                         |       | (950                            | )          | (27,272 | ) |
| Increase in  other assets                                                    |       | (114                            | )          | 73 |   |
| Net cash used in  investing activities                                       |       | (1,064                          | )          | (27,199 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |       |                            |       |   |   |
| Payments on  long-term obligations                                           |       | (3,140                          | )          | (1,730 | ) |
| Proceeds from  long-term obligations                                         |       | 2,943                           |       | 11,497 |   |
| Net proceeds  from sale of common stock                                      |       | 37,681                          |       | 17,566 |   |
| Net proceeds  from sale of preferred stock                                   |       | —                          |       | 41,887 |   |
| Payment of  preferred stock dividends                                        |       | (1,787                          | )          | (1,519 | ) |
| Proceeds from  exercise of stock options                                     |       | 123                             |       | 16 |   |
| Proceeds from  issuance of common stock from employee stock purchase plan    |       | 52                              |       | 38 |   |
| Net cash  provided by financing activities                                   |       | 35,872                          |       | 67,755 |   |
| NET (DECREASE) INCREASE  IN CASH AND CASH EQUIVALENTS                        |       | (3,491                          | )          | 14,767 |   |
| CASH AND CASH  EQUIVALENTS – Beginning of period                        |       | 51,112                          |       | 45,180 |   |
| CASH AND CASH EQUIVALENTS – End of period                               |       | $                               | 47,621     |   | $ | 59,947 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

5

----

**1.  Basis ofPresentation**

The accompanying unaudited condensed consolidatedfinancial statements of Acusphere, Inc. and Subsidiaries (the “Company”), havebeen prepared in accordance with generally accepted accounting principles inthe United States of America for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by generallyaccepted accounting principles in the United States of America for completefinancial statements. These statements should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’slatest audited annual financial statements. Those audited statements are includedin our Annual Report on Form 10-K for the year ended December 31, 2005, whichhas been filed with the SEC.

In the opinion of management, all adjustments,consisting only of normal, recurring adjustments considered necessary for afair presentation of the results of these interim periods have been included.The results of operations for the three and nine months ended September 30,2006 may not be indicative of the results that may be expected for the fullfiscal year.

The Company is subject to a number of risks similar tothose of pre-commercial stage companies, including dependence on keyindividuals, uncertainty of product development and generation of revenues,dependence on outside sources of capital, risks associated with clinicaltrials, dependence on third party collaborators for research operations, needfor regulatory approval of products, successful protection of intellectualproperty, and competition with larger, better-capitalized companies.  Successful completion of the Company’sdevelopment program and, ultimately, the attainment of profitable operations isdependent on future events, including obtaining adequate financing to fulfillits development activities and achieving a level of revenues adequate tosupport the Company’s cost structure. There are no assurances, however, that the Company will be able toobtain additional financing on favorable terms, or at all, or successfullymarket its products. See Item IA “Risk Factors.”

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements, and the reported amountsof expenses during the reporting period. Actual results could differ from thoseestimates or assumptions. The more significant estimates reflected in thesefinancial statements relate to revenue recognition, accrued expenses, embeddedderivatives, and valuation of stock-based compensation.

**2.  Revenue Recognition**

The Company recognizes revenue from licensearrangements in accordance with Staff Accounting Bulletin No. 104, RevenueRecognition (“SAB 104”) and Financial Accounting Standards Board (“FASB”)Emerging Issue Task Force Issue No. 00-21, Accounting for Revenue Arrangementswith Multiple Deliverables (“EITF 00-21”). The Company recognizes revenue fromlicense payments not tied to achieving a specific performance milestone ratablyover the period over which the Company is obligated to perform services. Theperiod over which the Company is obligated to perform services is estimatedbased on available facts and circumstances.  The Company periodically evaluates the assumptionsunderlying these estimates; significant changes in these assumptions couldresult in an adjustment to the period over which the revenue is recognized. TheCompany recognizes revenue from performance payments, when such performance issubstantially in the Company’s control and when the Company believes thatcompletion of such performance is reasonably probable, ratably over the periodover which the Company estimates that it will perform such performanceobligations. Substantive at-risk milestone payments, which are based onachieving a specific performance milestone when performance of such milestoneis contingent on performance by others or for which achievement can not bereasonably estimated or assured, are recognized as revenue when the milestoneis achieved and the related payment is due, provided that there is nosubstantial future service obligation associated with the milestone. Revenue inconnection with license arrangements is recognized over the term of thearrangement and is limited to payments collected or due and reasonably assuredof collection. In circumstances where the arrangement includes a refundprovision, the Company defers revenue recognition until the refund condition isno longer applicable unless, in the Company’s judgment, the refundcircumstances are within its operating control and unlikely to occur.  Payments received in advance of beingrecognized as revenue are deferred. Contract amounts which are not due until the customer accepts orverifies the research results are not recognized as revenue until customeracceptance, assuming collectibility is reasonably assured.

**3.  Accounting for Stock-based Compensation**

*Summaryof Stock-Based Compensation Plans*

Under the Company’s 2005Stock Option and Incentive Plan (the “2005 Plan”), the Company may grant up to1,700,000 shares of common stock to be issued as incentive stock options (“ISOs”),nonqualified stock option, awards of common stock and direct 

6

----

purchases of common stockby Acusphere employees, officers, directors and consultants. The maximum numberof shares that may be granted to any employee under the 2005 Plan may notexceed 1,000,000 shares of common stock during any calendar year. Optionsgranted have a term of 10 years and generally vest over four years. TheCompany settles employee stock option exercises with newly issued shares. As ofSeptember 30, 2006, there were 0.5 million options outstanding under the 2005Plan and 1.2 million shares available for future grant.

Under the Company’s 2003Stock Option and Incentive Plan (the “2003 Plan”), the Company may grant up to2,500,000 shares of common stock to be issued as ISOs, nonqualified stockoption, awards of common stock and direct purchases of common stock byAcusphere employees, officers, directors and consultants. The maximum number ofshares that may be granted to any employee under the 2003 Plan may not exceed583,334 shares of common stock during any calendar year. Options granted have aterm of 10 years and generally vest over four years. The Company settlesemployee stock option exercises with newly issued shares. As of September 30,2006, there were 2.4 million options outstanding under the 2003 Plan and 0.1million shares available for future grant.

In March 1994, the1994 Stock Plan (the “1994 Plan”) was approved. The 1994 Plan, as amended,provided that a maximum of 1,423,663 shares of common stock could be issued asISOs, nonqualified stock options and stock grants. The Company ceased grantingawards under the 1994 Plan after March 7, 2004. As of September 30, 2006,there were 1.0 million options outstanding under the 1994 Plan.

In July 2003, the2003 Employee Stock Purchase Plan (the “Purchase Plan”) was approved. ThePurchase Plan provides for the issuance of a maximum of 233,334 shares ofcommon stock. Eligible employee may contribute up to 10% of their total cashcompensation with a maximum of 417 shares semi-annually. The Company settlesemployee stock purchases under the Purchase Plan with newly issued shares. OnAugust 31, 2006, the Company issued 8,536 shares to employees under thePurchase Plan.  Acuspherehad 207,185 shares available for future sales of common stock under thisplan at September 30, 2006.

**Changein accounting for stock-based compensation plans**

Prior to January 1,2006, the Company had followed Accounting Principles Board (“APB”) OpinionNo. 25, “Accounting for Stock Issued to Employees”, and relatedinterpretations, which resulted in the accounting for grants of awards toemployees at their intrinsic value in the consolidated financial statements. Accordingly,no compensation expense was recorded for options issued to employees in fixedamounts and with fixed exercise prices at least equal to the fair market valueof the Company’s common stock at the date of grant. Conversely, when theexercise price for accounting purposes was below fair value of the Company’scommon stock at the date of grant, a non-cash charge to compensation expensewas recorded ratably over the term of the option vesting period in an amountequal to the difference between the value calculated using the exercise priceand the fair value. The Company did issue options prior to its initial S-1filing in July 2003 at values less than fair market. These grants resultedin the recording of deferred compensation. Effective January 1, 2006, the Company adopted FAS No. 123R, “Accountingfor Stock-Based Compensation,” (“FAS 123R”) using the modified prospectivemethod, which results in the provisions of FAS 123R being applied to theconsolidated financial statements on a going-forward basis. FAS 123R requirescompanies to recognize stock-based compensation awards granted to its employeesas compensation expense on a fair value method. Under the fair valuerecognition provisions of FAS 123R, stock-based compensation cost is measuredat the grant date based on the fair value of the award and is recognized asexpense over the service period, which generally represents the vesting period.The grant date fair value of stock options is calculated using theBlack-Scholes option-pricing model and the grant date fair value of restrictedstock is based on intrinsic value. The expense recognized over the serviceperiod is required to include an estimate of the awards that will be forfeited.Previously, the Company recorded the impact of forfeitures as they occurred.Options granted prior to the initial S-1 filing in 2003 continue to beaccounted for under APB No. 25.

All stock-based awards tonon-employees are accounted for at their fair market value in accordance withFAS 123R and Emerging Issues Task Force No. 96-18, “Accounting for EquityInstruments Than Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services.”

Total stock-basedcompensation expense was $0.7 million and $2.0 million for the three and ninemonths ending September 30, 2006, respectively. The incremental effect on stockcompensation expense as a result of the adoption of FAS 123R for the three and ninemonth periods ended September 30, 2006 was an additional charge of approximately$0.6 million, or $0.02 per share, and $1.7 million, or $0.07 per share,respectively.  The Company recognized thefull impact of its equity incentive plans in the consolidated statement ofoperations for the nine months ended September 30, 2006 under FAS 123R. Thefollowing table presents stock-based compensation expense included in theCompany’s consolidated statement of operations (in millions):

7

----

 
|                               | ** ** | **Three Months Ended**                                                                                                                                                   | ** ** | **Nine Months Ended**                                                                                                                                                    | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **September 30, 2006**                                                                                                                                                   | ** ** | **September 30, 2006**                                                                                                                                                   | ** ** |
|                          |       |                                                                                                                                                                               |       |                                                                                                                                                                               |       |
| Research &  development   |       | $                             0.3 |       | $                             0.8 |       |
| General &  administrative |       | $                             0.4 |       | $                             1.2 |       |
| Total                         |       | $                             0.7 |       | $                             2.0 |       |

 

The Company hadpreviously adopted the provisions of FAS No. 123, “Accounting forStock-Based Compensation,” as amended by FAS No. 148, “Accounting forStock-Based Compensation — Transition and Disclosure,” through disclosure only.The following table illustrates the effect on net loss and net loss per sharefor the three and nine months ended September 30, 2005 as if the Company hadapplied the fair value recognition provisions of SFAS 123 to all stock awards.
|                                                                                       | ** ** | **Three Months Ended**                                                                                                     | ** ** | **Nine Months Ended**                                                                                                      | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|
| **(in thousands, except per share amounts)**                 | ** ** | **September 30, 2005**                                                                                                     | ** ** | **September 30, 2005**                                                                                                     | ** ** |
| Net loss  applicable to common stockholders, as reported:                             |       | $                 (10,442                       | )          | $                 (34,789                       | )          |
| Add: Stock-based employee compensation expense  included in reported net loss         |       | 112                                                                                                                                  |       | 377                                                                                                                                  |       |
| Deduct: Stock-based employee compensation expense determined  under fair value method |       | (528                                                                                                                                 | )          | (1,576                                                                                                                               | )          |
| Net loss                                                                              |       | $                 (10,858                       | )          | $                 (35,989                       | )          |
| As reported                                                                           |       | $                     (0.58 | )          | $                     (1.95 | )          |
| Pro forma                                                                             |       | $                     (0.61 | )          | $                     (2.02 | )          |

 

As described above, theCompany had previously recorded deferred compensation for below fair valueoptions granted prior to the initial S-1 filing in 2003. As of September 30,2006, $0.1 million of deferred compensation has yet to be recognized. Suchamounts will be recognized over the next 3 months. The Company continues toexpense this deferred stock-based compensation to operations over the vestingperiod of the options, resulting in $0.1 million and $0.1 million asstock-based compensation expense for the three months ended September 30, 2006and September 30, 2005, respectively, and $0.2 million and $0.4 million asstock-based compensation expense for the nine months ended September 30, 2006and September 30, 2005, respectively.

The Company uses theBlack-Scholes option-pricing model to estimate the fair value of the options atthe grant date. The fair values of stock options granted during the three and nine-monthperiods ended September 30, 2006 and 2005 were calculated using the followingweighted-average assumptions:
|                         | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **              | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Volatility              |       | 50.72                                                    | %          | 46.27                                                   | %          | 39.65 | % | 47.09 | % |
| Risk-free interest rate |       | 4.70                                                     | %          | 4.05                                                    | %          | 4.63 | % | 3.74 | % |
| Forfeiture rate         |       | 0                                                        | %          | 0                                                       | %          | 0 | % | 0 | % |
| Expected option  life   |       | 5 years                                                  |       | 4 years                                                 |       | 5 years |   | 4 years |   |

 

The fair values ofoptions granted during six-month periods ended August 31, 2006 and 2005 underthe Company’s Purchase Plan were calculated using the followingweighted-average assumptions:
|                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Volatility              |       | 44.32    | %          | 46.61    | %          |
| Risk-free interest rate |       | 4.88     | %          | 3.89     | %          |
| Forfeiture rate         |       | 10       | %          | 10       | %          |
| Expected option life    |       | 6 months |       | 6 months |       |

 

The Company usedthe historical volatility of the Company’s market-traded stock for the expectedvolatility assumption input to the model. The risk-free rate is based on the U.S. Treasury yield curve in effectat the time of stock option grants and is based upon observed interest ratesappropriate for the expected term of such grants.

The expected life ofemployee stock options represents the weighted-average period the stock optionsare estimated to remain outstanding. The expected life of employee stockoptions is, in part, a function of the options’ remaining contractual life andthe extent to which the option is in-the-money (i.e., the average stock priceduring the period is above the strike price of the stock option). The 

8

----

Company estimates that,based on these variables, options are likely on average to be exercised in 5years.  The option life for options underthe Purchase Plan is six months, representing the time period under which theoption may be exercised as defined in the plan.

As share-basedcompensation expense is recognized based on awards ultimately expected to vest,it should be reduced for estimated forfeitures. FAS 123R requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. Forfeitures were estimated at 0% in the three and nine monthsended September 30, 2006 since the effect of forfeitures on the Company’sexpense is negligible due to the monthly vesting of option grants.

During the nine monthsended September 30, 2006, the Company granted stock options to existingemployees, as part of the Company’s performance review process, new employeesand Directors in lieu of cash based compensation. All such options were grantedwith exercise prices equal to the current market value of the underlying commonstock on the date of grant. Aggregate stock options granted during 2006 are asfollows:
|                                                 | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted Average**                                                                                         | ** ** | ** **                                                                       | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Number of** | ** ** | **Exercise Price** | ** ** | **Exercise Price**                                                                                           | ** ** | ** **                                                                       | ** ** |
| ** **                                      | ** ** | **Shares**         | ** ** | **Per Share**      | ** ** | **Per Share**                                                                                                | ** ** | **Fair Value**                                                              | ** ** |
|                                            |       |               |       |                    |       |                                                                                                              |       |                                                                             |       |
| For the three  months ended March 31, 2006:     |       | 928,829            |       | $5.42 - $6.59           |       | $                  5.84 |       | $         2,157,112                 |       |
| For the three  months ended June 30, 2006:      |       | 158,600            |       | $3.59 - $6.72           |       | $                  3.93 |       | $            289,588 |       |
| For the three months  ended September 30, 2006: |       | 159,300            |       | $2.40 - $3.87           |       | $                  3.30 |       | $            260,933 |       |

 

On August 31, 2006, thecompany issued 8,536 shares of its common stock under the Purchase Plan at$2.89 per share, reflecting 85% of the value of the closing stock price.

***Stock Options***

The following tablesummarizes the stock option activity in the equity incentive plans from January 1,2006 through September 30, 2006:
|                              | ** ** | ** **         | ** ** | ** **              | ** **          | **Weighted** | ** **                                                                                                        |
|------------------------------|------------|--------------------|------------|-------------------------|---------------------|--------------|-------------------------------------------------------------------------------------------------------------------|
| ** **                   | ** ** | ** **         | ** ** | ** **              | ** **          | **Average**  | ** **                                                                                                        |
| ** **                   | ** ** | **Number of** | ** ** | **Exercise Price** | ** **          | **Exercise** | ** **                                                                                                        |
| ** **                   | ** ** | **Shares**         | ** ** | **Per Share**      | ** **          | **Price**    | ** **                                                                                                        |
| Balance, January  1, 2006    |       |               | 3,135,033  |                    | $0.84 – $13.02 |         | $                  6.23 |   |
| Granted                      |       |               | 928,829    |                    | 5.42  – 6.59   |         | 5.84                                                                                                              |   |
| Exercised                    |       |               | (30,648    | )                       | 0.84  – 5.57   |         | 2.62                                                                                                              |   |
| Cancelled                    |       |               | (113,330   | )                       | 0.84  – 8.50   |         | 5.90                                                                                                              |   |
| Balance, March  31, 2006     |       |               | 3,919,884  |                    | 0.84  – 13.02  |         | 6.18                                                                                                              |   |
| Granted                      |       |               | 158,600    |                    | 3.59  – 6.72   |         | 3.92                                                                                                              |   |
| Exercised                    |       |               | (35,704    | )                       | 0.84  – 1.98   |         | 1.15                                                                                                              |   |
| Cancelled                    |       |               | (145,977   | )                       | 0.84  – 8.50   |         | 6.30                                                                                                              |   |
| Balance, June  30, 2006      |       |               | 3,896,803  |                    | 0.84  – 13.02  |         | 6.13                                                                                                              |   |
| Granted                      |       |               | 159,300    |                    | 2.40  – 3.87   |         | 3.30                                                                                                              |   |
| Exercised                    |       |               | (1,985     | )                       | 0.84  – 0.84   |         | 0.84                                                                                                              |   |
| Cancelled                    |       |               | (108,860   | )                       | 0.84  – 13.02  |         | 6.07                                                                                                              |   |
| Balance, September 30,  2006 |       |               | 3,945,258  |                    | $0.84 – 13.02  |         | $                  6.02 |   |

 

The following tablesummarizes information related to the Company’s options at September 30, 2006:
| ** **              | ** ** | ** **         | ** ** | **Outstanding**                              | ** ** | **Weighted** | ** **                                                                                                                          | ** **         | ** ** | **Weighted** | ** **                                                                                                                          |
|-------------------------|------------|--------------------|------------|----------------------------------------------|------------|--------------|-------------------------------------------------------------------------------------------------------------------------------------|--------------------|------------|--------------|-------------------------------------------------------------------------------------------------------------------------------------|
| ** **              | ** ** | ** **         | ** ** | **Weighted-Average**                         | ** ** | **Average**  | ** **                                                                                                                          | **Exercisable**    | ** ** | **Average**  | ** **                                                                                                                          |
| ** **              | ** ** | **Number of** | ** ** | **Remaining**                                | ** ** | **Exercise** | ** **                                                                                                                          | **Number**         | ** ** | **Exercise** | ** **                                                                                                                          |
| **Exercise Price** | ** ** | **Shares**         | ** ** | **Contractual Life (in Yrs)** | ** ** | **Price**    | ** **                                                                                                                          | **of Shares** | ** ** | **Price**    | ** **                                                                                                                          |
|                    |       |               |       |                                         |       |         |                                                                                                                                |               |       |         |                                                                                                                                |
| $0.00 - 1.30            |       |               | 416,828    |                                         | 5.7        |         | $                     0.87 |               | 399,816    |         | $                     0.87 |   |
| 1.31 - 2.60             |       |               | 55,993     |                                         | 2.8        |         | 1.93                                                                                                                                |               | 52,173     |         | 1.90                                                                                                                                |   |
| 2.61 - 3.91             |       |               | 295,400    |                                         | 9.8        |         | 3.45                                                                                                                                |               | 37,144     |         | 3.58                                                                                                                                |   |
| 3.92 - 5.21             |       |               | 287,900    |                                         | 8.9        |         | 4.83                                                                                                                                |               | 135,172    |         | 4.85                                                                                                                                |   |
| 5.22 - 6.51             |       |               | 1,821,939  |                                         | 8.7        |         | 5.83                                                                                                                                |               | 575,904    |         | 5.88                                                                                                                                |   |
| 6.52 - 7.81             |       |               | 287,900    |                                         | 6.5        |         | 7.00                                                                                                                                |               | 200,387    |         | 7.16                                                                                                                                |   |
| 7.82 - 9.11             |       |               | 276,682    |                                         | 7.2        |         | 8.73                                                                                                                                |               | 181,788    |         | 8.74                                                                                                                                |   |
| 9.12 - 10.42            |       |               | 218,500    |                                         | 7.4        |         | 9.59                                                                                                                                |               | 145,411    |         | 9.59                                                                                                                                |   |
| 10.43 - 13.02           |       |               | 284,116    |                                         | 6.9        |         | 13.02                                                                                                                               |               | 216,068    |         | 13.02                                                                                                                               |   |
|                    |       |               | 3,945,258  |                                         | 7.9        |         | $                     6.02 |               | 1,943,863  |         | $                     6.10 |   |

 

9

----

The total cash receivedfrom employees as a result of employee stock option exercises during the nine-monthperiod ended September 30, 2006 was approximately $0.1 million.

As of September 30, 2006,the aggregate intrinsic value of fully vested and exercisable options is $11.9 million.

As of September 30, 2006,there was $4.6 million of total expected unrecognized compensation costrelated to unvested stock options granted under the Company’s stock-basedcompensation plans. That cost is expected to be recognized over aweighted-average period of 2.9 years.

**4.  Net Loss Per Common Share**

Basic and diluted net loss per common share iscalculated by dividing the net loss available to common stockholders by theweighted-average number of unrestricted common shares outstanding during theperiod. Diluted net loss per common share is the same as basic net loss percommon share, since the effects of potentially dilutive securities are anti-dilutivefor all periods presented. As of September 30, 2006 and 2005, anti-dilutivesecurities, which consist of convertible exchangeable preferred stock, stockoptions, warrants, and restricted common stock that are not included in thediluted net loss per share calculation aggregated 12,309,343 and 10,851,371shares, respectively.

The following table reconciles weighted-average commonshares outstanding to the shares used in the computation of basic and dilutedweighted-average common shares outstanding:
|                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                           | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005**    | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| Weighted-average  common shares outstanding                          |       | 28,819,307                       |       | 17,917,911                      |       | 26,571,694 |   | 17,855,868 |   |
| Less  weighted-average unvested restricted common shares outstanding |       | —                           |       | (2,508                          | )          | (422 | ) | (3,588 | ) |
| Basic and diluted  weighted-average common shares outstanding        |       | 28,819,307                       |       | 17,915,403                      |       | 26,571,272 |   | 17,852,280 |   |

 

**5.  Propertyand Equipment**

Property and equipment at cost consist of thefollowing (in thousands):

|                                                  | ** ** | **As of:**                                                           | ** ** | ** **                                                                | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **September 30,  2006**                                              | ** ** | **December 31,  2005**                                               | ** ** | **Estimated  Useful Life** | ** ** |
| Equipment                                        |       | $           23,026 |       | $           20,589 |       | 3 –  5 years |   |
| Furniture and  fixtures                          |       | 424                                                                       |       | 345                                                                       |       | 5  years |   |
| Leasehold  improvements                          |       | 31,005                                                                    |       | 30,986                                                                    |       | Lease  term (a) |   |
| Sub-total depreciable assets                     |       | 54,455                                                                    |       | 51,920                                                                    |       |   |   |
| Less:  accumulated depreciation and amortization |       | (19,576                                                                   | )          | (11,886                                                                   | )          |   |   |
| Total depreciable assets, net                    |       | 34,879                                                                    |       | 40,034                                                                    |       |   |   |
| Deposits on  equipment purchases                 |       | 369                                                                       |       | 1,205                                                                     |       | N/A |   |
| Construction in  progress                        |       | —                                                                    |       | 601                                                                       |       | N/A |   |
| Total property  and equipment                    |       | $           35,248 |       | $           41,840 |       |   |   |

10

----

 

----

(a)             Thecompany depreciates leasehold improvements and equipment under capital leasesover the lesser of their useful lives or the remainder of their respectivelease terms.

Leaseholdimprovements primarily represent costs incurred for the build-out of theCompany’s commercial manufacturing facility in Tewksbury, Massachusetts, whichare being depreciated over the remaining initial lease term. Deposits onequipment purchases represent progress payments made for long-lead time capitalequipment purchases.

**6.  IntellectualProperty**

The Company expensesintellectual property costs incurred in obtaining license rights and patentsrights to technology or products for which technological feasibility has notbeen commercially demonstrated and no alternative future use has been shown toexist.  No amount has been capitalized by the Company relating to thecosts of intellectual property developed or acquired by the Company.

Effective June 1,2006, the Company entered into an agreement to license on a non-exclusive basisvarious ultrasound-related intellectual property from GE Healthcare (“GE”), adivision of General Electric Company. The agreement provides the Company withuse of GE’s ultrasound contrast agent patents and patent applications incombination with the Company’s lead product candidate ImagifyTM (perflubutane polymermicrospheres for delivery in an injectable suspension, pronounced i-maj’-i-fī,formerly known as AI-700) in the field of ultrasound contrast agents, as wellas any patents that GE acquires in the field within 12 months of the agreement.The term of the agreement extends until expiration of the last of the patentslicensed under the agreement.  Inconsideration of the non-exclusive license of these patents, the Company agreedto pay GE $10.0 million prior to commercial approval of Imagify, of which $5.0million was paid in June 2006 and $5.0 million is due in June 2007.  In addition, the Company agreed to pay GE$5.0 million upon the commercial approval of Imagify (defined as the first tooccur of the approval of a New Drug Application in the United States or theapproval of a Marketing Authorization Application in Europe) and $5.0 million uponthe one year anniversary of such commercial approval.  The latter two $5.0 million payments arecontingent upon achievement of future milestone events and, accordingly, havenot been recorded at this time.  Foraccounting purposes the Company has not demonstrated technological feasibilityor an alternative future use for these patents. Therefore, $9.5 million was expensed upon the consummation of theagreement, representing the initial $5.0 million June 2006 payment and the presentvalue of the $5.0 million June 2007 payment.

Also effectiveJune 1, 2006, the Company entered into an agreement to license on anon-exclusive basis various ultrasound-related intellectual property fromBracco International BV (“Bracco”). The agreement provides the Company with useof Bracco’s ultrasound-related patents and patent applications in combinationwith the Company’s lead product candidate Imagify in the field of ultrasounddiagnostic imaging. The term of the agreement extends until expiration of thelast of the patents licensed under the agreement.  In consideration for the non-exclusivelicense of these patents, the Company agreed to pay Bracco up to a total royalty of Euros 3.0 million,of which Euros 0.5 million (approximately $0.6 million at September 30, 2006)was paid in June 2006. An additional Euros 2.5 million is payable upon theCompany’s achievement of certain defined regulatory milestones.  The Company also agreed to pay a royalty onfuture Imagify revenue, up to a maximum royalty amount of Euros 10.0 million,less a portion of the above-referenced milestone payments. For accountingpurposes the Company has not demonstrated technological feasibility or analternative future use for these patents. Therefore, the $0.6 million paymentwas expensed in June 2006 when paid, whereas the other obligations have notbeen recorded since they are contingent upon the outcome of future events.

On May 11, 2005, theCompany entered into a Patent Transfer Agreement with ScheringAktiengesellschaft (“Schering”) pursuant to which the Company acquired rights,title and interest in certain ultrasound-related patents from Schering. Inconsideration of the transfer and assignment of these patents, the Companyagreed to pay Schering a total of $7.0 million of which $1.0 million was paidin May 2005, $3.0 million was paid in May 2006, and $3.0 million isdue in May 2007. For accounting purposes the Company has not demonstratedtechnological feasibility or an alternative future use for these patents.  Therefore, the present value of thisacquisition cost, $6.2 million, was expensed in May 2005 at the time ofacquisition.

11

----

**7.  Long-term Obligations**

The carrying value oflong-term obligations is as follows:
|                              | ** ** | **As of:**                                                                                                       | ** ** |
|------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **September 30,  2006**                                                                                          | ** ** | **December 31,  2005** | ** ** |
| Capital lease  obligations   |       | $                   99 |       | $                   65 |   |
| Notes payable                |       | 15,464                                                                                                                |       | 15,696 |   |
| Other long-term  obligations |       | 7,511                                                                                                                 |       | 5,567 |   |
|                         |       | 23,074                                                                                                                |       | 21,328 |   |
| Less current  maturities     |       | (12,333                                                                                                               | )          | (6,727 | ) |
| Long-term obligations,  net  |       | $            10,741                                       |       | $            14,601 |   |

 

Long-term obligationsoutstanding as of September 30, 2006, including current maturities, consistedof capital equipment leased under various capital lease arrangements,promissory notes under equipment financing lines, the present value of amountspayable to GE and Schering and borrowings under a facility loan agreement. Monthly payments under the capital lease obligations mature through June2011.

**8.  Deferred Revenue**

In July 2004, theCompany entered into a collaboration, license and supply agreement with Nycomedin which the Company granted Nycomed rights to develop and market Imagify inEurope.  As of September 30, 2006, Nycomedhas paid $12.0 million in license fees for the Company’s research and developmentefforts which was being recognized ratably in revenue over the developmentperiod, as defined, initially estimated at 42 months in July 2004.  Estimation of this development periodinvolves many assumptions.  The Company regularlyassesses these assumptions, and its estimated development recognition periodmay change if facts and circumstances change.  During the third quarter of2006, management reevaluated the assumptions underlying the development termand revised the estimated development period from 48 as of June 30, 2006 to 54months.  This change in estimate resultedin no revenue being recognized under this collaboration agreement for the threemonths ended September 30, 2006. The remaining $6.0 million of the $12.0million in development payments already received, but yet to be recognized asrevenue, are included in deferred revenue at September 30, 2006 and will berecognized over the remaining estimated development period.

In October 2005 andFebruary 2006, the Company and Nycomed amended the collaboration agreementto accelerate $2.0 million in milestone payments in order to fund certainactivities associated with brand development and qualification of a commercialmanufacturing facility. The $2.0 million in payments received pursuant to theseamendments through September 30, 2006 are considered advances against a futuremilestone payment for a European regulatory filing, or Marketing AuthorizationApplication (“MAA”). This amount is classified as deferred revenue until theMAA milestone is achieved, provided that the applicable revenue recognitioncriteria are met.

**9.  Stockholders’ Equity**

OnAugust 31, 2006, the Company entered into what is sometimes termed anequity line of credit arrangement with Azimuth Opportunity Ltd. The arrangementprovides that, upon the terms and subject to the conditions set forth therein,Azimuth is committed to purchase up to $30,000,000 of the Company’s commonstock, or as of September 30, 2006, up to approximately 5.8 million shares ofcommon stock (resulting in gross proceeds of $20.8 million based upon the$3.61 per share closing market price of the Company’s common stock onSeptember 29, 2006), whichever occurs first, over the 18-month term of theagreement. No shares of common stock were issued nor was any commitment feepaid to Azimuth in connection with the execution and delivery of the agreement.The Company is not required to sell any shares of common stock under theagreement.

Fromtime to time during the term of the agreement, and at the Company’s solediscretion, the Company may present Azimuth with draw down notices requiringAzimuth to purchase the Company’s common stock at a per share purchase priceequal to the daily volume weighted average price of the common stock, less adiscount ranging from 3.875% to 5.875%. Since the number of shares to be issued in connection with any draw downpricing period, and the aggregate purchase price for these shares, will not beknown until the draw down pricing period is complete, the Company does notexpect that it will publicly announce the issuance of a draw down notice toAzimuth until the completion of the draw down pricing period.  As of September 30, 2006 the Company has notissued any shares under this agreement.

12

----

On April 12, 2006, theCompany sold 5,772,004 units, each unit consisting of (i) one share of commonstock (ii) one warrant to purchase 0.3 shares of common stock at an exerciseprice of $7.97 per share, for a purchase price of $6.9675 per unit, resultingin aggregate gross proceeds to the Company of $40.2 million (net proceeds ofapproximately $37.8 million after deducting underwriting discounts andcommissions and estimated offering expenses). The shares of common stock and warrants were immediately separable andwere issued separately.   The warrantswill be exercisable beginning on October 12, 2006 and until April 12, 2011.

On February 24, 2005, theCompany issued 900,000 shares of 6.5% convertible exchangeable preferred stock(the “Preferred Stock”) at $50.00 per share resulting in aggregate grossproceeds to the Company of $45.0 million (net proceeds of approximately $41.9million after deducting underwriting discounts, commissions and offeringexpenses).  Each share of Preferred Stockhas a liquidation preference of $50.00 per share.  As of September 30, 2006, 730,000 shares ofPreferred Stock were outstanding.

Dividends on thePreferred Stock are cumulative from the date of original issue at the annualrate of $3.25 per share, payable quarterly on the first day of March, June,September, and December.  Any dividendsmust be declared by the Company’s board of directors and must come from fundsthat are legally available for dividend payments.  As of September 30, 2006, dividends had beenpaid on the Company’s Preferred Stock through September 1, 2006.

On November 7, 2006, theCompany’s board of directors declared a quarterly dividend in the amount of$0.8125 per share of Preferred Stock payable on December 1, 2006 to the holdersof record as of the close of business on November 15, 2006.

The Preferred Stock isconvertible into the Company’s common stock at any time at the option of theholder at a conversion rate of 7.2886 shares of common stock for each share ofPreferred Stock, based on an initial conversion price of $6.86 per share. The initial conversion price is subject to adjustment in certain customaryevents, but is not subject to “price based” anti-dilution adjustment. TheCompany has reserved approximately 6.3 million shares of common stock forissuance upon such conversion.

The Company may elect toautomatically convert some or all of the Preferred Stock into shares of commonstock if the closing price of the Company’s common stock has exceeded $10.30per share (150% of the conversion price) for at least 20 trading days duringany 30-day trading period, ending within five trading days prior to notice ofautomatic conversion.  Prior to March 1, 2009, if the Company electsto automatically convert, or if any holder elects to voluntarily convert, thePreferred Stock, the Company will also make an additional payment (“Make-Whole”payment) equal to the aggregate amount of dividends that would have beenpayable on the Preferred Stock so converted from the original date of issuancethrough and including March 1, 2009, less any dividends already paid onthe Preferred Stock.  This additional payment is payable by the Company,at its option, in cash, in additional shares of its common stock, or in acombination of cash and shares of common stock.   The Company hasreserved a maximum of approximately 2.0 million shares of common stock forissuance under this Make-Whole provision.

In accordance withStatement of Financial Accounting Standards No. 133, “*Accountingfor Derivative Instruments”* (SFAS 133), the Company is required toseparate and account for as an embedded derivative, the dividend make-wholepayment feature of the Preferred Stock offering. As an embedded derivativeinstrument, the dividend make-whole payment feature must be measured at fairvalue and reflected as a liability. Changes in the fair value of the derivativeare recognized in earnings as a component of other income/(expense).  The Company determined the fair value of thedividend make-whole payment feature to be $3.1 million at February 24,2005 (the commitment date).  This amountwas allocated from the proceeds of the Preferred Stock to the derivativeliability.  During 2005, make-wholepayments related to the conversion of 160,000 shares were made and thederivative liability was reduced for the fair value of these payments.  As of September 30, 2006 and June 30, 2006,the derivative liability was valued at $0.3 million and $0.4 million,respectively, resulting in the recognition of approximately $0.1 million and$0.6 million in other income for the three and nine month periods ending September30, 2006, respectively.

In April 2006, one stockholder voluntarily converted10,000 shares of preferred stock into 72,886 shares of the Company’s commonstock.  In connection with theconversion, the Company issued an additional 15,526 shares of the Company’scommon stock in satisfaction of the required Make-Whole payment.  The fair value of this payment wasapproximately $0.1 million, which was charged to the derivative liabilityduring the second quarter of 2006.

The Company may elect toredeem the Preferred Stock on or after March 6, 2009 at declining redemptionprices.

The Preferred Stock isexchangeable, in whole but not in part, at the option of the Company on anydividend payment date beginning on March 1, 2006 (the “Exchange Date”) forthe Company’s 6.5% convertible subordinated debentures (“Debentures”) at therate of 

13

----

$50 principal amount ofDebentures for each share of Preferred Stock.  The Debentures, if issued,will mature 25 years after the Exchange Date and have terms substantiallysimilar to those of the Preferred Stock. The Preferred Stock has no maturity date and no voting rights prior toconversion into common stock, except under limited circumstances.

**10.  Warrants**

On April 12, 2006, theCompany sold 5,772,004 units, each unit consisting of (i) one share of commonstock (ii) one warrant to purchase 0.3 shares of common stock at an exerciseprice of $7.97 per share, for a purchase price of $6.9675 per unit, resultingin aggregate gross proceeds to the Company of $40.2 million.  Warrants to purchase an additional 1,731,600shares of common stock were issued under this offering and will be exercisablebeginning on October 12, 2006 and until April 12, 2011.

As of September 30, 2006,warrants to purchase shares of the Company’s stock, the origination of whichwere derived in connection with debt and lease financing transactions, thecollaborative agreement with Nycomed and the April 2006 common stock offering,were outstanding for an aggregate of 3,043,384 shares of common stock at aneffective weighted average price of $8.72 per share as follows:
| Number of  Shares | ** ** | **Exercise Price  Per Share** | ** ** | **Expiration  Date**    | ** ** |
|------------------------|------------|-----------------------------------------|------------|-------------------------|------------|
| 7,517                  |       | 12.84                                   |       | June 6, 2007       |       |
| 5,194                  |       | 28.50                                   |       | February 21, 2008  |       |
| 3,404                  |       | 18.00                                   |       | February 26, 2008  |       |
| 450,897                |       | 8.46                                    |       | April 11, 2008     |       |
| 684                    |       | 14.00                                   |       | April 11, 2008     |       |
| 7,540                  |       | 8.46                                    |       | June 27, 2008      |       |
| 573,105                |       | 8.50                                    |       | August 2, 2008     |       |
| 16,212                 |       | 19.80                                   |       | October 16, 2008   |       |
| 14,934                 |       | 19.80                                   |       | October 19, 2008   |       |
| 114,895                |       | 8.50                                    |       | October 20, 2008   |       |
| 55,732                 |       | 6.28                                    |       | November 30, 2009  |       |
| 2,688                  |       | 19.80                                   |       | January 5, 2010    |       |
| 30,844                 |       | 28.50                                   |       | March 30, 2011     |       |
| 28,138                 |       | 28.50                                   |       | September 27, 2011 |       |
| 1,731,600              |       | 7.97                                    |       | April 12, 2011          |       |
| 3,043,384              |       |                                    |       |                    |       |

 

**11.  NewAccounting Pronouncements**

In July 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. (FIN) 48, “*Accounting forUncertainty in Income Taxes*,” which is effective January 1, 2007.The purpose of FIN 48 is to clarify and set forth consistent rules foraccounting for uncertain tax positions in accordance with SFAS 109, “*Accounting for Income Taxes*” by requiringthe application of a “more likely than not” threshold for the recognition andderecognition of tax positions. The Company is currently assessing what impact,if any, the adoption of this statement will have on its consolidated financialstatements.

 

In September 2006, the FASB issued SFAS (FAS) No. 157, “*Fair Value Measurements*,” which iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. The purposeof FAS 157 is to clarify and set forth consistent rules for defining fairvalue, establishing a framework for measuring fair value in generally acceptedaccounting principles and expanding disclosures about fair value measurements.FAS 157 applies under other accounting pronouncements that require or permit fairvalue measurements where those accounting pronouncements have determined thatfair value is the relevant measurement attribute. FAS 157 does not require anynew fair value measurements, but for some entities the application of FAS 157 couldchange current practice.  The Company iscurrently assessing what impact, if any, the adoption of this statement willhave on its consolidated financial statements.

 

In September 2006, the SEC issued Staff Accounting Bulletin No. (SAB)108. The purpose of SAB 108 is to clarify and set forth consistent rules forthe consideration of the effects of prior year misstatements in quantifyingcurrent year misstatements for the purpose of a materiality assessment. TheCompany does not believe the adoption of SAB 108 will have a material impact onits consolidated financial statements.

14

----

 

**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**ForwardLooking Statements May Prove Inaccurate**

*Statementscontained herein, including without limitation, “Management’s Discussion andAnalysis of Financial Condition and Results of Operation,” contains certainprojections, estimates and other forward-looking statements. “Forward-lookingstatements,” as that term is defined in the Private Securities LitigationReform Act of 1995, are not historical facts and involve a number of risks anduncertainties. Words herein such as “may,” “will,” “should,” “could,” “would,” “expects,”“plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “intends,”“potential,” and similar expressions (as well as other words or expressionsreferencing future events, conditions or circumstances) are intended toidentify forward-looking statements.*

*Forward-lookingstatements include, but are not limited to: our plans to develop and market newproducts and the timing of these development programs, in particular the timingof clinical trials and regulatory milestones for**Imagify; our clinicaldevelopment of product candidates, clinical trials and our ability to obtainand maintain regulatory approval for our product candidates; our estimatesregarding our capital requirements and our needs for additional financing; ourestimates of expenses and future revenues and profitability; our estimates ofthe size of the potential markets for our product candidates; our selection andlicensing of product candidates; our ability to attract collaborators withacceptable development, regulatory and commercialization expertise; thebenefits to be derived from corporate collaborations, license agreements andother collaborative efforts, including those relating to the development andcommercialization of our product candidates; sources of revenues andanticipated revenues, including contributions from corporate collaborations,license agreements and other collaborative efforts for the development andcommercialization of products; our ability to create an effective direct salesand marketing infrastructure for products we elect to market and sell directly;the rate and degree of market acceptance of our product candidates; the timingand amount of reimbursement for our product candidates; the success of othercompeting therapies that may become available; and the manufacturing capacityfor our product candidates, including our plans to qualify a commercialmanufacturing facility for Imagify.*

*Ouractual results and the timing of certain events may differ materially from theresults discussed, projected, anticipated or indicated in any forward-lookingstatements. Any forward-looking statement should be considered in light offactors discussed in Part II. Item 1A “Risk Factors” and elsewhere in thisreport. We caution readers not to place undue reliance on any suchforward-looking statements, which speak only as of the date they are made. Wedisclaim any obligation, except as specifically required by law and therules of the Securities and Exchange Commission, to publicly update orrevise any such statements to reflect any change in company expectations or inevents, conditions or circumstances on which any such statements may be based,or that may affect the likelihood that actual results will differ from thoseset forth in the forward-looking statements.*

*Thefollowing discussion should be read in conjunction with our consolidatedfinancial statements and related notes thereto included elsewhere in thisForm 10-Q.*

**Overview**

We are a specialtypharmaceutical company that develops new drugs and improved formulations ofexisting drugs using our proprietary porous microparticle technology. We are focusedon developing proprietary drugs that can offer significant benefits such asimproved safety and efficacy, increased patient compliance, greater ease ofuse, expanded indications or reduced cost. Our three initial product candidatesare designed to address large unmet clinical needs within cardiology, oncologyand asthma. Our lead product candidate is a cardiovascular drug in Phase 3clinical development for the detection of coronary heart disease, the leadingcause of death in the United States.

We created our initialproduct candidates using technology that enables us to control the size andporosity of particles in a versatile manner, so we can customize the particlesto address the delivery needs of a variety of drugs. We are focused on creatingporous microparticles that are smaller than red blood cells. Some of thesemicroparticles are nanoparticles which are smaller than 1 micron. Smallmicroparticles are important for delivering drugs intravenously so that theycan pass through the body’s smallest blood vessels, for increasing the surfacearea of a drug so that the drug will dissolve more rapidly, and for deliveringdrugs to the lung via inhalation. Porosity is important for entrapping gases inmicroparticles, for controlling the release rate of the drug from amicroparticle, and for targeting inhaled drugs to specific regions of the lung.

15

----

We have incurredsignificant operating losses to develop our product candidates and weanticipate continuing to incur significant operating losses in the comingyears. In particular, we expect to incur significant additional expenses andexperience other significant capital requirements for the conduct of our Phase3 clinical program for ImagifyTM (perflubutane polymer microspheres fordelivery in an injectable suspension, pronounced i-maj’-i-fī, formerlyknown as AI-700) and to complete the build-out and qualification of amanufacturing facility for the initial commercial manufacture of Imagify. Sinceour inception, we have funded our operations primarily through private andpublic placements of equity securities, equipment-backed financings and otherdebt financings.

**Imagify Phase 3 Clinical Trial**

Our Phase 3 clinical planprovides for a two-part program consisting of a pilot phase (the “pilotstudy”), under which new investigators and blinded readers have been qualifiedand trained, and two independent multi-center pivotal trials.  These two pivotal trials, previously referredto as the “32” and “33” trials, in preparation for completion of the trialshave been re-named RAMP-1 and RAMP-2, respectively. “RAMP” stands for Real-time Assessment of Myocardial Perfusion with echocardiography.Clinical investigators were qualified in the pilot phase on a rolling basis.The pilot phase was completed in 2005. Clinical investigators in the Phase 3pivotal studies are located at clinical sites in North America, Europe andAustralia.  Data from the Phase 3 pivotal studies are intended forsubmission to U.S., European, and potentially other regulatory authorities.

*The Pivotal Trials.*  The Phase 3 pivotal studies are designed todemonstrate that stress echo with Imagify is non-inferior to nuclear stresstesting.  Clinical sites thatparticipated in these studies were primarily in the U.S. and Europe. Allpatients enrolled in these studies received a stress echo with Imagify. Most ofthese patients also received a nuclear stress test. The Imagify-enhanced stressecho images and the nuclear stress images resulting from these studies areforwarded by the clinical sites to an independent clinical researchorganization where all information about the patients, other than what is shownby the images themselves, is removed. Because all such patient information isremoved from the images, evaluators of the images are referred to as blindedreaders. Images produced by Imagify-enhanced stress echo are evaluated byechocardiologists (i.e. echo blinded readers). Images produced by nuclearstress tests are evaluated by nuclear cardiologists (i.e. nuclear blindedreaders).

A truth standard defineswhich patients have disease and which patients are normal, and serves as thebasis for quantifying the performance of the echo blinded readers and theperformance of the nuclear blinded readers. Non-inferiority is determined by comparing the performance of the echoblinded read relative to the nuclear blinded read.

Non-inferiority ofImagify-enhanced stress echo relative to nuclear stress is evaluated in threeways, which are the primary endpoints of the pivotal trials. First,non-inferiority is evaluated in all patients (i.e. accuracy). Thennon-inferiority is evaluated in two different subsets of patients, those withdisease (i.e. sensitivity) and those without disease (i.e. specificity). Thecriteria for success for each primary endpoint is for two of the three echoblinded readers to be non-inferior to the nuclear blinded reader(s). In theRAMP-1 study there was one primary nuclear blinded reader. In the RAMP-2 studythere are three primary nuclear blinded readers.

During the pivotaltrials, we intentionally have no access to efficacy data. We do not publiclydisclose results from a pivotal trial until after the trial is closed, qualitycontrol checks are completed, the database is locked, the data are revealed tous and we have had an opportunity to review and understand the data, includingdata regarding clinical outcomes and safety results. A total of 777 patientswith known or suspected coronary heart disease have been enrolled in the Phase3 pivotal trials.

*RAMP-1 trial.*  320 patients were enrolled in the RAMP-1clinical trial. Patients eligible for this trial had, in accordance withcurrent clinical practice, been referred for a nuclear stress test. All RAMP-1patients received an Imagify-enhanced stress echo as well as a nuclear stresstest. The truth standard in this trial was angiography, clinical outcome orclinical outcome with the un-blinded evaluation of the nuclear stress test. Thetruth standard was angiography in 42% of patients.

In June 2006, weannounced preliminary results of the RAMP-1 study.  The accuracy and specificity results exceededthe criteria for success.   3 of 3 echoblinded readers had statistically non-inferior accuracy  to the nuclear blinded reader, whose accuracywas 70% (all p value <0.005).   2 ofthe 3 echo blinded readers had statistically superior specificity to the nuclearblinded reader, whose specificity was 63% (p value for both with respect tonon-inferiority <0.001). The sensitivity results missed the criteria forsuccess of the trial 

16

----

 

with 1 of 3 blinded echoreaders having statistical non-inferior sensitivity (p=0.002) to the nuclearblinded reader’s sensitivity of 78%. Based upon our review of the safety data from this trial, we believeImagify was well tolerated. Greater than 99% of the images acquired frompatients enrolled in the trial were readable.

The majority of adverseevents (“AEs”) reported were mild in intensity, transient, and resolved withoutresidual effects. The most common AEs reported were headache, chest pain,nausea, flushing and dizziness and the majority of these AEs occurred followingthe administration of the dipyridamole pharmacologic stress agent prior tostress imaging. Serious adverse events (SAEs) and dose discontinuation wasexperienced in four and five of 320 patients, respectively. All SAEs werenon-life threatening, transient, and resolved without residual effects.

*RAMP-2 Trial.*  In June 2006, we announced completion ofenrollment of 457 patients in this trial. Patients eligible for this trial hadbeen referred for a coronary angiogram. All patients enrolled in this clinicaltrial received an Imagify-enhanced stress echo. Approximately 420 patients alsoreceived a nuclear stress test for purposes of evaluation against the primaryendpoints of this study.  The truthstandard for patients in this study is coronary angiography. As dictated by thetrial design, all patients in this trial were evaluated for up to thirty daysfollowing the stress echo study.  Once all images have been read, and allpatient data from the follow-up period and angiography data are collected, anindependent third-party clinical research organization, on our behalf, willconduct quality control checks. These checks, which can take up to 90 days, aredesigned to ensure that all of the required information has been fully gatheredand filed before locking the database. At that time, the data may be unblindedand made available to us for analysis.

In October 2006, weannounced that we had trained all of the echo blinded readers in the RAMP-2trial to increase their sensitivity while maintaining high accuracy. We arecontinuing to train the echo blinded readers in an effort to ensure that gainsin sensitivity do not lower specificity below targeted levels. Based upon ourfindings from this training, we intend to have each of the RAMP-2 echo blindedreaders evaluate , to the extent possible, all images for the primary efficacyanalysis of the RAMP-2 trial. Although this training and intended to increasethe likelihood of success for the RAMP-2 trial, we cannot assure you that theRAMP-2 results will meet or exceed the clinical endpoints. We currently expectthat the results from RAMP-2 will be publicly available in the second quarterof 2007, and that the NDA submission will occur in the second half of 2007. Noadditional patients are expected to be enrolled in the RAMP-2 study.

*TrialDesign and Purpose.*   We believe that stress echowith Imagify has the potential to significantly reduce the time, cost andresources needed in the assessment of myocardial perfusion, compared to nuclearstress testing. Myocardial perfusion is blood flow to the heart muscle, asensitive marker for coronary heart disease.  There is no ultrasoundcontrast agent approved by FDA for use in stress echo or myocardial perfusionimaging. Based upon the endpoints described above, our RAMP-1 and RAMP-2 trialsare designed to demonstrate non-inferiority of stress echo with Imagifyrelative to nuclear stress testing. In April 2005, based in part upon feedbackfrom FDA, we revised the statistical analysis plan on which we base our patientenrollment estimates for the Imagify Phase 3 clinical trials. Since that timewe have continued discussions with the FDA regarding trial design and ourstatistical analysis plan.  As a result of our ongoing discussions withFDA, we may make further revisions. These discussions could lead to delays inthe public announcement of the results from our RAMP-2 clinical trial andaffect whether Imagify is approved for the indication that we are seeking, thetiming of such approval or whether Imagify is approved at all.

The estimates of andtiming of blinded reads, data lock, data release and NDA submission in ourPhase 3 trials reflect our current assumptions, based on our knowledge andexperience and the guidance of our advisors.  We cannot assure you thatthese timelines will be met, nor can we assure you that our estimates andassumptions will not change based upon ongoing regulatory feedback or that,when the RAMP-2 trial is completed, we will successfully achieve results thatmeet or exceed the clinical endpoints or that the FDA will accept and approveour NDA once submitted.

**Imagify Manufacturing Facility Update**

We intend to demonstratethat we can produce Imagify at a commercial manufacturing scale prior to our submissionof an NDA for Imagify and, subject to required regulatory approvals, we intendto manufacture Imagify in this facility for commercial use. This commercialmanufacturing facility must comply with current good manufacturing practices,or cGMPs, enforced by the FDA and overseas regulatory agencies.

In July 2004, weentered into a lease agreement for 58,000 square feet of commercialmanufacturing and office space in Tewksbury, Massachusetts. In late 2005, wesubstantially completed the build-out of this facility and commenced start-upactivities relating to the manufacturing equipment installed at the site.  Depreciation of costs incurred for thisbuild-out commenced in the fourth quarter of 2005 when the related assets wereplaced into service.  In early 2006 wecompleted commissioning of the manufacturing equipment and utilities within thefacility. We recently produced full commercial scale development batches of Imagifyin this facility, an important step towards the qualification of the productionof Imagify in this facility and reduction of the technology transfer risk. Inaddition, we are working to qualify the facility in compliance with currentgood manufacturing practices (“cGMP’s”). Completion of such qualificationincludes significant testing and documentation. We have previously demonstratedthat we can produce Imagify in a qualified manner at contract manufacturingsites. We need to repeat this demonstration in our commercial manufacturingfacility prior to submission of our NDA.

The next steps in the qualification of the manufacturing process areaseptic qualification of the facility, product stability testing and completionof other validation activities under cGMPs. Data from the production of Imagifyunder cGMPs is intended to be part of our

17

----

NDA submission of Imagify.  Based upon our current plans, we expect tocomplete this qualification phase in time to support a NDA submission in thesecond half of 2007.

Although the build-out ofthe facility and the commissioning of the equipment are substantially complete,we cannot assure you that we will not encounter complications in thequalification of operations in this facility, which complications could addadditional costs or delay our submission of a NDA for Imagify. In support ofour efforts to qualify our commercial manufacturing facility for Imagify, inFebruary 2006, we and Nycomed agreed to amend the 2004 strategiccollaboration agreement resulting in commitment by Nycomed to accelerate $1.85million in payments to us in order to fund certain activities associated withthe qualification of our manufacturing facility.  As of September 30, 2006 we have received thefull $1.85 million in qualification payments from Nycomed.

**EuropeanCollaboration Agreement**

In July 2004, weentered into a collaboration, license and supply agreement with Nycomedpursuant to which we granted Nycomed rights to develop and market Imagify inEurope. As part of the agreement, Nycomed has agreed to provide up to$70 million in license fees, research and development funding, andmilestone payments, including $12 million in payments over the first twoyears, of which the final $1 million was paid to us in April 2006. Theremaining $58 million in milestone payments are related to regulatoryapprovals and achievement of certain sales goals. In addition, Nycomed hasagreed to pay us to manufacture Imagify for them and to pay us royalties onNycomed’s sales of Imagify. Nycomed will be responsible for sales, marketingand the regulatory submissions required for marketing throughout its salesterritory, which includes the member states of the European Union, as well asRussia/CIS and Turkey.

In October 2005, we andNycomed agreed to amend the strategic collaboration agreement in order toaccelerate $150,000 in milestone payments to support activities associated withImagify brand development, including related international trademarkactivities. In February 2006, we and Nycomed further amended the agreementto accelerate $1.85 million in milestone payments in order to fund certain activitiesassociated with the qualification of our manufacturing facility, as discussedabove. The payments received pursuant to these amendments are consideredadvances against a future milestone payment for a European regulatory filing,or Marketing Authorization Application (“MAA”), and will be deducted from thatmilestone payment. Payments received under these amendments will be classifiedas deferred revenue until the MAA milestone is achieved, provided that theapplicable revenue recognition criteria are met.  As of September 30, 2006 we have received theentire $1.85 million in payments for qualification costs from Nycomed and haveincluded this amount in deferred revenue.

The Nycomed agreement issubject to termination provisions. Under certain of these terminationprovisions, if we fail in any material respect to use all commerciallyreasonable efforts to carry out referenced obligations under the agreement, wewould be obligated to pay Nycomed liquidated damages of up to $12.0 million.We plan to carry out all of these obligations, which we believe are in ourcontrol. However, there can be no assurance that termination of this agreementwill not occur or that such termination would not result in us incurringliquidated damages of up to $12.0 million.

**FinancialOperations Overview**

*Revenue.*    Wehave not generated any revenue from product sales since our inception. SinceJuly 2004, when we entered into our collaboration agreement with Nycomed, themajority of our revenue has been collaboration revenue recognized in connectionwith research and development activities performed under this agreement.  As of September 30, 2006 Nycomed has paid us$12.0 million in license fees for our research and development efforts. We arerecognizing this $12.0 million of initial license and research and developmentpayments ratably over a period currently estimated at 54 months.  The period over which we are obligated toperform services is estimated based on available facts and circumstances.  We periodically evaluate the assumptionsunderlying these estimates.

Further in the future, wewill seek to generate revenue from a combination of product sales, up-front ormilestone payments and manufacturing payments in connection with collaborativeor strategic relationships, and royalties resulting from the license of ourproducts and intellectual property.

*Researchand Development Expense.*    Research anddevelopment expense consists of expenses incurred in developing, manufacturingand testing product candidates. These expenses consist primarily of salariesand related expenses for personnel, fees paid to professional service providersin conjunction with independently monitoring our clinical trials and acquiringand evaluating data in conjunction with our clinical trials, costs of materialsused in clinical trials and research and development, depreciation of capitalresources used to develop our products, costs of facilities, the legal costs ofpursuing patent protection on select elements of 

18

----

our intellectual property,costs for intellectual property rights we have acquired or licensed andstock-based compensation. We expense research and development costs, includingpatent related costs, as incurred. We believe that significant investment inproduct development is a competitive necessity and plan to continue theseinvestments in order to realize the potential of our product candidates andproprietary technologies. Development programs for later stage productcandidates, such as Imagify, tend to cost more than earlier stage programs dueto the length and the number of patients enrolled in clinical trials for laterstage programs and due to costs of scaling production to commercial scale.

*Generaland Administrative Expense.*    Generaland administrative expense consists primarily of salaries and other relatedcosts for personnel in executive, finance, accounting, information technology,business development and human resource functions. Other costs include facilitycosts not otherwise included in research and development expense, professionalfees for legal and accounting services and stock-based compensation.

*InterestIncome.*    Interest income consists ofinterest earned on our cash and cash equivalents.

*InterestExpense.*    Interest expense consists ofinterest incurred on equipment leases and other financing arrangements. Interest expense also includes interest recognized in connection with embeddedderivatives.

*Changein Valuation of Derivative.*    The terms of ourFebruary 2005 convertible preferred stock offering and our March 2005Mass Development loan agreement contain features considered to be embeddedderivatives which are recorded at estimated fair value in accordance withStatement of Financial Accounting Standards No. 133, Accounting forDerivative Instruments (SFAS 133). Changein valuation of derivative consists of other income (expense) recognized on thechange in fair value of the derivative at the end of each reportingperiod.  The change in the value of thederivative related to the preferred stock is affected by a number ofassumptions including the number of preferred shares outstanding, the amount ofdividends paid and the probability and timing of conversion into common stock.The derivative liability is reduced for any make-whole payments made during theperiod upon conversions of preferred stock to common stock. The change in thevalue of the derivative related to the loan is affected by the expected timingof future positive net cash flows from operations.

*Dividendson Preferred Stock.  * Dividends on preferred stockconsisted of dividends paid or accumulated on the convertible exchangeablepreferred stock which we issued in February 2005. Dividends on preferredstock exclude any make-whole payments on conversion of preferred stock tocommon stock. Dividends on our preferred stock are cumulative from the date oforiginal issue at the annual rate of $3.25 per share, payable quarterly on thefirst day of March, June, September, and December. Any dividend payment must bedeclared by our board of directors and must come from funds that are legallyavailable for dividend payments.

**Resultsof Operations**

*ThreeMonths Ended September 30, 2006 and 2005*

*Revenue.*   As of September 30, 2006, in connection with our collaboration agreement withNycomed, Nycomed has paid us $12.0 million in license fees for our research anddevelopment efforts. We had previously been recognizing this $12.0 million inresearch and development payments ratably over the estimated development period,as defined, of 48 months.  Estimation ofthis development period involves many assumptions.  We regularly assess these assumptions and ourestimated development recognition period may change if facts and circumstanceschange.  We reevaluated the assumptions underlying the development termand during the three months ended September 30, 2006, modified our estimate ofthe development period over which we are obligated to perform services to 54 months.  This change in estimate resulted in norevenue being recognized from the license agreement for the three months ended September30, 2006.

*Researchand Development Expense*.    Researchand development expense for the three months ended September 30, 2006 increased$1.1 million, or 12%, to $10.0 million versus $8.9 million in the prior yearperiod. The increase was due primarily to higher depreciation of $1.9 million primarilydue to our new manufacturing facility upon which depreciation commenced inOctober 2005, partially offset by lower expenses associated with our clinicaltrials. Clinical trial costs were lower than the prior year primarily due tothe completion of RAMP-1 patient enrollment in December 2005 and the completionof RAMP-2 patient enrollment in June 2006.

19

----

Thefollowing table summarizes the primary components of our research anddevelopment expense for the three months ended September 30, 2006 and 2005:
|                                         | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005** | ** ** |
| ** **                              | ** ** | **(in thousands)**          | ** ** |
| Total direct  costs                     |       | $                                | 6,348      |   | $ | 6,481 |   |
|                                    |       |                             |       |   |   |
| Indirect costs:                         |       |                             |       |   |   |
| Facility costs                          |       | 969                              |       | 1,331 |   |
| Depreciation                            |       | 2,482                            |       | 563 |   |
| All other indirect costs                |       | 194                              |       | 481 |   |
| Total indirect  costs                   |       | 3,645                            |       | 2,375 |   |
| Total research and  development expense |       | $                                | 9,993      |   | $ | 8,856 |   |

 

We expect to incur higherexpense for the commercial manufacturing facility during the remainder of 2006 versusthe prior year due to the ongoing validation costs for the facility and itsequipment, the purchase of raw materials and laboratory supplies and higherstaffing levels.  Research anddevelopment costs generally increase as programs progress from early stageclinical trials to late stage clinical trials. Our primary research anddevelopment programs are as follows:

*LateStage Clinical Development Program*.  Our late stageclinical develop program relates to our lead product candidate, Imagify, whichis a cardiovascular drug for the detection of coronary heart disease. Almostall of our direct research and development expenditures for the three monthsended September 30, 2006 and 2005 relate to our Imagify program.  Since we have completed patient enrollment inour RAMP-1 and RAMP-2 trials, we expect our expense rate for clinical trial coststo decrease compared to clinical trial costs incurred in the prior year.  However, we anticipate some other clinicalcosts to continue as we seek to complete the RAMP-2 blinded reads and conductmarketing driven studies such as evaluating the performance of Imagify onvarious equipment platforms.

*EarlyStage Development Programs*.  We have completed Phase 1clinical trials for the initial clinical applications of our HDDS technology,AI-850, and our PDDS technology, AI-128. In addition, in 2006 we completed our portion of a feasibility studyregarding the use of our HDDS technology in connection with a product candidateunder development by a large pharmaceutical company.  Potential expansion of this collaboration ispending the completion of a review by that pharmaceutical company. While wehave given spending priority to Imagify, we continue to evaluate our HDDS andPDDS opportunities, including potential opportunities with partners, theproduct candidates referenced above and other potential product candidates. During2007 the costs of early stage development programs could increase, dependingupon the extent to which we are successful in commencing new feasibilitystudies with partners, if at all, and the extent to which we elect toaccelerate HDDS and PDDS development. Because these programs are in relativelyearly stages of development, we anticipate that costs related to Imagify willcontinue to represent our primary research and development expenditures through2007.

*Generaland Administrative Expense.*    Generaland administrative expense for the three months ended September 30, 2006increased $1.2 million, or 71%, to $2.9 million versus $1.7 million in theprior year period.  The increase was primarily due to additionalstock-based compensation expense from the adoption of FAS 123R ($0.4 million), withthe balance primarily from higher personnel costs due to increased staffing levelsand to increased market research and business development activities whichcosts may continue to increase.

20

----

The following tablesummarizes the primary components of our general and administrative expense forthe three months ended September 30, 2006 and 2005: 
|                                           | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005** | ** ** |
| ** **                                | ** ** | **(in thousands)**          | ** ** |
| Total direct  costs                       |       | $                                | 2,766      |   | 1,636 |   |
|                                      |       |                             |       |   |   |
| Indirect costs:                           |       |                             |       |   |   |
| Facility costs                            |       | 126                              |       | 67 |   |
| Depreciation                              |       | 51                               |       | 44 |   |
| Total indirect  costs                     |       | 177                              |       | 111 |   |
| Total general and  administrative expense |       | $                                | 2,943      |   | $ | 1,747 |   |
|                                           |            |                                  |            |  |  |  |  |

 

*InterestIncome.*    Interest income for the threemonths ended September 30, 2006 increased $0.2 million, or 40%, to $0.7 millionversus $0.5 million in the prior year period.  The increase was primarilydue to higher average cash balances during the period.

*InterestExpense.*    Interest expense for the threemonths ended September 30, 2006 increased to $0.6 versus $0.4 million in prioryear period.   The increase was primarily due to higher cumulativeborrowings during the period under our equipment financing lines.

*Changein Valuation of Derivative.*     Thechange in the valuation of derivative resulted in income of $57,000 during the threemonths ended September 30, 2006 versus expense of $20,000 in the prior yearperiod.  As of September 30, 2006 and June30, 2006, the derivative liability was valued at approximately $0.3 million and$0.4 million, respectively.

*NineMonths Ended September 30, 2006 and 2005*

*Revenue.*    Asof September 30, 2006, in connection with our collaboration agreement withNycomed, Nycomed has paid us $12.0 million in license fees for our research anddevelopment efforts. We had previously been recognizing this $12.0 million inresearch and development payments ratably over the estimated development period,as defined, of 42 months.  During 2006 wemodified our estimate of the development period.  This change in estimate resulted in norevenue being recognized from the license agreement during the second and thirdquarters.  We have recognized $0.9million under this collaboration agreement for the nine months ended September30, 2006.

During the nine month period ended September 30, 2006we recognized revenue of $0.2 million related to a feasibility study with alarge pharmaceutical company utilizing our HDDS technology.  Also during the nine month period ended September30, 2006 we performed clinical research services on behalf of Nycomed, relatingto Imagify.  We were paid for theseservices on a time and materials basis and recognized approximately $0.1million in revenue during the period.

*Research and Development Expense.*    Research and developmentexpense for the nine months ended September 30, 2006 increased $10.7 million,or 34%, to $42.5 million versus $31.8 million in the prior year period. The increase was due primarily to higher depreciation primarily due to our newmanufacturing facility ($5.8 million), and higher intellectual propertyacquisition costs ($3.9 million), with the remaining increase ($0.3 million) primarilydue to higher stock-based compensation expense from the adoption of FAS 123R andhigher personnel costs due to increased staffing levels, partially offset bylower expenses associated with our clinical trials.  Clinical trial costs were lower than theprior year primarily due to the completion of RAMP-1 patient enrollment inDecember 2005 and the completion of RAMP-2 patient enrollment in June 2006.

21

----

The following tablesummarizes the primary components of our research and development expense forthe nine months ended September 30, 2006 and 2005: 
|                                                      | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **September 30,  2006**    | ** ** | **September 30,  2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**         | ** ** |
| Total direct  costs                                  |       | $                               | 21,264     |   | $ | 19,262 |   |
|                                                 |       |                            |       |   |   |
| Indirect costs:                                      |       |                            |       |   |   |
| Facility costs                                       |       | 3,054                           |       | 3,672 |   |
| Depreciation                                         |       | 7,416                           |       | 1,589 |   |
| All other indirect costs                             |       | 636                             |       | 1,020 |   |
| Total indirect  costs                                |       | 11,106                          |       | 6,281 |   |
| Write-off of  intellectual property acquisition cost |       | 10,137                          |       | 6,218 |   |
| Total research and  development expense              |       | $                               | 42,507     |   | $ | 31,761 |   |

 

Research and developmentexpense includes $10.1 million and $6.2 million for the nine months endedSeptember 30, 2006 and 2005, respectively, for the patents acquired or licensedunder the GE, Bracco and Schering agreements.

We expect to incur higherexpense for the commercial manufacturing facility for the remainder of 2006 versusthe prior year due to the ongoing validation costs for the facility and itsequipment, the purchase of raw materials and laboratory supplies and higherstaffing levels.  We expect that thisincrease in costs related to our manufacturing facility will be offset beoverall lower clinical costs due to the completion of our RAMP-1 and RAMP-2clinical trials for Imagify.  Researchand development costs generally increase as programs progress from early stageclinical trials to late stage clinical trials. Our primary research anddevelopment programs are as follows:

*LateStage Clinical Development Program*.  Our late stageclinical develop program relates to our lead product candidate, Imagify, whichis a cardiovascular drug for the detection of coronary heart disease. Almostall of our direct research and development expenditures for the nine monthsended September 30, 2006 and 2005 relate to our Imagify program. Since we havecompleted patient enrollment in our RAMP-1 and RAMP-2 trials, we expect ourexpense rate for clinical trial costs to decrease compared to clinical trial costsincurred in the prior year.  However, weanticipate some clinical costs to continue as we seek to complete the RAMP-2blinded reads and conduct marketing driven studies such as evaluating theperformance of Imagify on various equipment platforms.

*EarlyStage Development Programs*.  We have completed Phase 1clinical trials for the initial clinical applications of our HDDS technology,AI-850, and our PDDS technology, AI-128. In addition, in 2006 we completed ourportion of a feasibility study regarding the use of our HDDS technology inconnection with a product candidate under development by a large pharmaceuticalcompany.  Potential expansion of thiscollaboration is pending the completion of a review by that pharmaceuticalcompany. While we have given spending priority to Imagify, we continue toevaluate our HDDS and PDDS opportunities, including potential opportunitieswith partners, the product candidates referenced above and other potentialproduct candidates.  During 2007 thecosts of early stage development programs could increase, depending upon theextent to which we are successful in commencing new feasibility studies withpartners, if at all, and the extent to which we elect to accelerate HDDS andPDDS development. Because these programs are in relatively early stages ofdevelopment, we anticipate that costs related to Imagify will continue torepresent our primary research and development expenditures through 2007.

*Generaland Administrative Expense.*    Generaland administrative expense for the nine months ended September 30, 2006increased $2.9 million, or 52%, to $8.5 million versus $5.6 million in theprior year period.  The increase was primarily due to additionalstock-based compensation expense from the adoption of FAS 123R ($1.0 million), withthe balance primarily from higher personnel costs due to increased staffing levelsand to increased market research and business development activities.

22

----

The following tablesummarizes the primary components of our general and administrative expense forthe nine months ended September 30, 2006 and 2005: 
|                                           | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **September 30,  2006**    | ** ** | **September 30,  2005** | ** ** |
| ** **                                | ** ** | **(in thousands)**         | ** ** |
| Total direct  costs                       |       | $                               | 7,995      |   | 5,319 |   |
|                                      |       |                            |       |   |   |
| Indirect costs:                           |       |                            |       |   |   |
| Facility costs                            |       | 393                             |       | 188 |   |
| Depreciation                              |       | 149                             |       | 101 |   |
| Total indirect  costs                     |       | 542                             |       | 289 |   |
| Total general and  administrative expense |       | $                               | 8,537      |   | $ | 5,608 |   |
|                                           |            |                                 |            |  |  |  |  |

 

We anticipate an increasein general and administrative expense for the remainder of 2006 versus theprior year due to personnel costs associated with higher staffing levels,higher stock-based compensation expense under FAS 123R, increased marketresearch costs and increased costs for business development activities tosupport product development efforts, investor relations and other activities. Weanticipate that market research and business development activities may continueto increase resulting in potentially higher general and administrative costs.

*InterestIncome.*    Interest income for the nine monthsended September 30, 2006 increased $0.6 million, or 46%, to $1.9 million versus$1.3 million in the prior year period.  The increase was primarily due tohigher average cash balances during the period.

*InterestExpense.*    Interest expense for the ninemonths ended September 30, 2006 increased to $1.7 million versus $0.9 millionin prior year period.  The increase was primarily due to higher cumulativeborrowings during the period under our equipment financing lines.

*Changein Valuation of Derivative.*     Thechange in the valuation of derivative resulted in income of $0.6 million duringthe nine months ended September 30, 2006 versus income of $1.4 million in theprior year period.  As of September 30,2006 and December 31, 2005, the derivative liability was valued atapproximately $0.3 million and $1.1 million, respectively.

**Liquidityand Capital Resources**

Historically, aside frompayments received in connection with our strategic collaboration with Nycomed,we have financed our business through the issuance of equity securities, debtfinancings and equipment leases. Our liquidity requirements have arisenprimarily from research and development expenditures, leasehold improvements,equipment expenditures and payments on outstanding indebtedness. As of September30, 2006 we owed $23.0 million under notes payable and other long-termobligations and $0.1 million under capital leases, of which $12.3 million isclassified as current maturities.  Wealso had multi-year operating lease commitments totaling $17.0 million forrent on our facilities.

During the nine monthsended September 30, 2006, operating activities used $38.3 million of cash. Netcash used by operating activities during this period resulted primarily from anet loss of $49.1 million, a decrease in accrued expenses of $2.1 millionand the non-cash amortization of deferred revenue of $0.9 million.  Theseuses of cash were partially offset primarily by non-cash charges for depreciationand amortization of $7.7 million, a decrease in deferred revenue of $2.1million, non-cash stock-based compensation of $2.0 million, the netwrite-off of intellectual property acquired of $1.5 million and non-cashinterest expense of $0.5 million.

During the nine monthsended September 30, 2006, investing activities used $1.1 million in cash,primarily for purchases of manufacturing equipment.  We intend to seek financing for future equipmentpurchases under additional secured lines of credit.

During the nine monthsended September 30, 2006, financing activities provided $35.9 million,primarily from an offering on April 12, 2006 of 5,772,004 shares of commonstock and warrants, net of transaction costs.

Effective June 9,2006, we entered into a promissory note with General Electric CapitalCorporation (“GE Capital”) in aggregate original principal amount totaling $1.5million for equipment already purchased by us. The promissory note includes anannual interest rate of 10.69% and is payable over 42 consecutive months. Thepromissory note is secured by the financed equipment 

23

----

pursuant to the terms of ourMaster Security Agreement with GE Capital. The promissory note is subject toacceleration upon the happening of customary events of default, including thefailure to make timely payments of principal and interest.

Effective June 1,2006, we entered into an agreement to license on a non-exclusive basis variousultrasound-related intellectual property from GE Healthcare (“GE”), a divisionof General Electric Company. The agreement provides us with use of GE’sultrasound contrast agent patents and patent applications in combination with ourlead product candidate Imagify in the field of ultrasound contrast agents, aswell as any patents that GE acquires in the field within 12 months of theagreement. In consideration of the non-exclusive license of these patents, we agreedto pay GE $10.0 million prior to commercial approval of Imagify, of which $5.0million was paid in June 2006 and $5.0 million is due in June 2007.  In addition, we agreed to pay GE $5.0 millionupon the commercial approval (defined as the first to occur of the approval ofa New Drug Application in the United States or the approval of a MarketingAuthorization Application in Europe) of Imagify and $5.0 million upon the oneyear anniversary of such commercial approval. The latter two $5.0 million payments are contingent upon achievement offuture milestone events and, accordingly, have not been recorded at this time.

Also effectiveJune 1, 2006, we entered into an agreement to license on a non-exclusivebasis various ultrasound-related intellectual property from BraccoInternational BV (“Bracco”). The agreement provides us with use of Bracco’sultrasound-related patents and patent applications in combination with our leadproduct candidate Imagify in the field of ultrasound diagnostic imaging. Inconsideration the non-exclusive license of these patents, we agreed to payBracco up to a total royalty of Euros3.0 million, of which Euros 0.5 million (approximately $0.6 million at September30, 2006) was paid in June 2006. An additional Euros 2.5 million is payableupon our achievement of certain defined regulatory milestones.  We also agreed to pay a royalty on future Imagifyrevenue, up to a maximum royalty amount of Euros 10.0 million, less a portionof the above-referenced milestone payments. Whereas the other obligations arecontingent upon the outcome of future events, they have not been recorded atthis time.

On April 12, 2006, wesold 5,772,004 units, each unit consisting of (i) one share of common stock and(ii) one warrant to purchase 0.3 shares of common stock at an exercise price of$7.97 per share, for a purchase price of $6.9675 per unit, resulting inaggregate gross proceeds to us of $40.2 million (net proceeds of approximately$37.8 million after deducting underwriting discounts and commissions andestimated offering expenses).  Units arenot issued or certificated.  The sharesof common stock and warrants were immediately separable and were issuedseparately.   The warrants will beexercisable beginning on October 12, 2006 and until April 12, 2011.

On May 11, 2005, weentered into a Patent Transfer Agreement with Schering pursuant to which weacquired rights, title and interest in certain ultrasound-related patents fromSchering. In consideration of the transfer and assignment of these patents, weagreed to pay Schering a total of $7.0 million of which $1.0 million was paidin May 2005, $3.0 million was paid in May 2006, and $3.0 million isdue in May 2007.

We estimate, based uponour current operating plans, that our cash burn rate will reduce our total cashand cash equivalents from $47.6 million at September 30, 2006 to approximately$35.0 million at December 31, 2006.  Weestimate cash spending from operating activities will be approximately $10 to $12 millionin the fourth quarter of 2006 including spending necessary to complete theRAMP-2 blinded reads. We currently anticipate that our quarterly cash spendingwill remain in a similar range through the first half of 2007.  In addition, we anticipate net quarterlypayments of approximately $1.5 million per quarter for repayment of debtrelated to prior equipment purchases and capital leases and quarterly paymentsof approximately $0.6 million per quarter for payment of dividends onoutstanding preferred stock.  Weanticipate that our capital expenditures during this period will average lessthan $1.0 million per quarter and we will continue to seek debt financing forsuch purchases.  Also, as discussedabove, in May and June 2007, we are scheduled to make payments of $3.0 millionand $5.0 million, respectively, in connection with the intellectual propertyagreements that we have entered into with Schering and GE.

We believe, based on ouroperating plans, that our existing resources, excluding potential proceeds fromthe equity line financing available to us effective August 2006, will beadequate to fund our planned operations, including spending necessary tocomplete the blinded reads of the RAMP-2 results, to mid-2007. Unless we reduceour rate of spending, within the next twelve months, we will requiresignificant additional funds, which we may raise through public or privatesales of equity, or from borrowings, or from strategic partners. Our futurecapital requirements will depend on many factors, including the scope andprogress made in our research and development activities, including costsrelated to clinical trials and qualification of our commercial manufacturingfacility, clinical trial results and the need for regulatory approvals. We mayalso need additional funds for possible future strategic acquisitions ofbusinesses, products or technologies complementary to our business. We do notexpect to generate significant revenues for Imagify, other than possiblelicense or milestone payments, unless or until we or current or potentialpartners complete clinical trials and receive marketing approval from theapplicable regulatory authorities. When additional funds are required or, inadvance of such requirements, when we anticipate that funds will be needed, wemay raise such funds from time to time through public or private 

24

----

sales of equity or fromborrowings or we may delay funding of certain development activities whichcould delay the filing of our Imagify NDA and the commercialization of Imagifywhich would have a materially adverse impact on our growth plans. Additional equity financing may be dilutive to our stockholders and debtfinancing, if available, may involve significant cash payment obligations andcovenants that restrict our ability to operate as a business; and strategicpartnerships may result in royalties or other terms which reduce our economicpotential from products under development.

**UniversalShelf Registration Statement**

We have on file with theU.S. Securities and Exchange Commission (“SEC”) a “universal shelf”registration statement on Form S-3 (Registration No. 333-134263) anda universal shelf registration statement on Form S-3 (RegistrationNo. 333-123854), which provide for the offer, from time to time, of commonstock, preferred stock, debt securities and warrants up to an aggregate remainingavailability of approximately $100.0 million and $27.0 million,respectively.  The SEC declared the shelfregistration statements effective on June 1, 2006 and April 15, 2005,respectively.  Subject to marketconditions and our capital needs, and so long as we are then eligible to usethe registration statement under SEC rules, we may again seek to use anyremaining availability under the shelf registration statement by making anoffering of securities covered for sale under the registration statement. Inaddition, we may amend our shelf registration statement or file a newshelf registration statement to increase our potential access to capital. If weelect to raise additional capital using a shelf registration statement, we mayuse the net proceeds from the sale of these securities for general corporatepurposes, which may include funding clinical trials, research and development,regulatory activities and the expansion of our commercial manufacturingfacility in Tewksbury, Massachusetts, acquisitions, including acquisitions ofcompanies, products, intellectual property or other technology, repayment orrefinancing of existing indebtedness, investments, capital expenditures,repurchase of our capital stock and for any other purposes that we may specifyin any prospectus supplement.

**Equity Line of Credit Arrangement**

On August 31, 2006,we entered into what is sometimes termed an equity line of credit arrangementwith Azimuth Opportunity Ltd. The arrangement provides that, upon the terms andsubject to the conditions set forth therein, Azimuth is committed to purchaseup to $30,000,000 of our common stock, or as of September 30, 2006, up toapproximately 5.8 million shares of common stock, whichever occurs first, overthe 18-month term of the agreement.

No shares of common stockwere issued, nor did we pay any commitment fee, to Azimuth in connection withthe execution and delivery of the agreement. We are not required to sell anyshares of common stock under the agreement.

From time to time duringthe term of the agreement, and at our sole discretion, we may present Azimuthwith draw down notices requiring Azimuth to purchase our common stock at a pershare purchase price equal to the daily volume weighted average price of thecommon stock, less a discount ranging from 3.875% to 5.875%.  Since the number of shares to be issued by usin connection with any draw down pricing period, and the aggregate purchaseprice for these shares, will not be known until the draw down pricing period iscomplete, we do not expect that it will publicly announce the issuance of adraw down notice to Azimuth until the completion of the draw down pricingperiod.

**Off-BalanceSheet Financing Arrangements**

We currently donot have any special purpose entities or off-balance sheet financingarrangements other than operating leases.

**ContractualObligations**

The following tablesummarizes our contractual obligations as of September 30, 2006 and the effectsuch obligations are expected to have on our liquidity and cash flow in futureperiods:

**Payments Due by Period**
| Contractual Obligations                                      | ** ** | **Total  Obligations  All Years** | ** ** | **2006  Remaining** | ** ** | **2007  Through  2008** | ** ** | **2009  Through  2010** | ** ** | **After 2010** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------|------------|-------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                                                        | ** ** | **(in thousands)**                | ** ** |
| Capital lease  obligations (including interest)                   |       | $                                      | 115        |                | $          | 8                       |       | $                       | 65         |                | $          | 42 |   | $ | — |   |
| Operating lease  obligations                                      |       | 16,966                                 |       | 699                 |       | 5,977                   |       | 6,092                   |       | 4,198               |       |
| Notes payable  (including interest)                               |       | 17,858                                 |       | 1,443               |       | 12,415                  |       | 4,000                   |       | —              |       |
| Intellectual  property acquisition cost obligations               |       | 8,000                                  |       |                |       | 8,000                   |       |                    |       |                |       |
| Purchase orders  for capital equipment and leasehold improvements |       | —                                 |       | —              |       | —                  |       | —                  |       | —              |       |
| Total contractual cash  obligations                               |       | $                                      | 42,939     |                | $          | 2,150                   |       | $                       | 26,457     |                | $          | 10,134 |   | $ | 4,198 |   |

 

25

----

Our capital leaseobligations relate to leases for business equipment.  Our operating lease obligations relate to ourfacility leases.  Notes payable relateprimarily to financing leases for our equipment and leasehold improvements inour Tewksbury manufacturing facility. Intellectual property acquisition cost obligations relate to thepayments due under our agreements with GE and Schering.  Purchase orders for capital equipment andleasehold relate primarily to a final payment due to the contractor for thebuild-out of our Tewksbury facility.  Theabove table excludes contingent milestone and royalty obligations.

**CriticalAccounting Policies and Estimates**

Our discussion andanalysis of our financial condition and results of operations are based on ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities and expenses. On an on-goingbasis, we evaluate our estimates and judgments, including those related toaccrued expenses, fair valuation of stock related to stock-based compensationand income taxes. We base our estimates on historical experience and on variousother assumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.  We believe the followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our consolidated financial statements.

*Revenue.  *We recognize revenue from license arrangements in accordance with StaffAccounting Bulletin No. 104, Revenue Recognition (“SAB 104”) and FASBEmerging Issue Task Force Issue No. 00-21, Accounting for RevenueArrangements with Multiple Deliverables (“EITF 00-21”). We recognize revenuefrom license payments not tied to achieving a specific performance milestoneratably over the period over which we are obligated to perform services. Theperiod over which we are obligated to perform services is estimated based onavailable facts and circumstances. We recognize revenue from performancepayments, when such performance is substantially in our control and when webelieve that completion of such performance is reasonably probable, ratablyover the period over which we estimate that we will perform such performanceobligations. Substantive at-risk milestone payments, which are based onachieving a specific performance milestone when performance of such milestoneis contingent on performance by others or for which achievement can not bereasonably estimated or assured, are recognized as revenue when the milestoneis achieved and the related payment is due, provided that there is nosubstantial future service obligation associated with the milestone. We do notrecognize revenue in connection with license arrangements until payments arecollected or due and reasonably assured of being collected. In addition, we donot recognize revenue in circumstances where the arrangement includes a refundprovision until the refund condition is no longer applicable unless, in ourjudgment, the refund circumstances are within our operating control andunlikely to occur. Payments received in advance of being recognized as revenueare deferred.

In connection with ourfeasibility study, contract amounts which are not due until the customeraccepts or verifies the research results are not recognized as revenue untilcustomer acceptance, assuming collectibility is reasonable assured.

We are recognizingcollaboration revenue of $12.0 million associated with the initial license andperformance-based payments under the Nycomed agreement based on an estimatedrecognition period of fifty-four months over which we are obligated to performservices supporting the agreement and assumes that Imagify will be ready forcommercialization in the second half of 2008. At the time we entered into ouragreement with Nycomed, we estimated that the development period would be 42months.  This estimate was revised to 54months in the third quarter of 2006. Estimation of this development period involves many assumptions,including estimates relating to completion of activities for which we arereliant on Nycomed and independent regulatory authorities to achieve.  Our estimated development recognition periodmay change again if facts and circumstances change. Were the estimateddevelopment period to be extended, we may be required to record a reduction incumulative revenue recognized in our statement of operations in the period inwhich the change in development period is determined. Our agreement withNycomed has been modified such that Nycomed has paid us $150,000 for activitiesassociated with creating a brand name for Imagify and related trademarkactivities and to reimburse us for up to $1.8 million for support of activitiesto support the validation of the our commercial manufacturing facility for Imagify.These 

26

----

amounts were originallyscheduled to be paid to us upon Nycomed’s filing for regulatory approval of Imagifyin Europe. While the amounts are not refundable, we plan to defer recognitionof these amounts until after the original regulatory filing milestone has beenachieved. Payments received for current and potential HDDS and PDDS feasibilitystudies, which are offset by costs incurred for such studies, are recognized asrevenue over the estimated performance period of each such study. A change inthese estimates could result in a significant change to the amount of revenuerecognized in future periods. In addition, if the Nycomed collaborationagreement is terminated for reasons other than certain non-performance by us,we would recognize the remainder of the payments we have received or otherwiseexpect to collect over the amortization period at the time of termination. Wewill not recognize revenue associated with the potential additional $56 millionin milestone-based payments that may be earned under the Nycomed agreementuntil the underlying regulatory and sales milestones are achieved.

*Propertyand Equipment.*   Property and equipment arerecorded at cost and depreciated over their estimated useful lives of three tofive years using the straight-line method. The majority of our equipment isrelated to our ongoing research and development activities, including equipmentwhich, subject to regulatory approvals, we intended to use for commercialmanufacture of Imagify. We consider that this equipment is placed in servicewhen operation of the equipment is started-up and begin depreciating theequipment at this time. The equipment in our commercial manufacturing facilityis currently undergoing research and development related activities that resultin wear and tear on the equipment including include ongoing calibration andtesting.

Leasehold improvementsand equipment under capital leases are recorded at cost. We depreciateleasehold improvements and equipment under capital leases over the lesser oftheir useful lives or the remainder of their respective lease terms. Duringperiods of leasehold build-out, we record such costs and construction inprogress and do not begin depreciation of such costs until the improvements aresubstantially completed and available for use. We began depreciation ofleasehold improvements at our Tewksbury facility in October 2005 uponreceipt of an occupancy permit and taking occupancy of the facility. Ourleasehold improvements costs on this facility approximate $23.6 million and arebeing depreciated ratably over remaining term of our present lease, the initialterm of which is scheduled in expire in April 2010. We believe that theuse of the initial term of the lease for the depreciation period, rather thanassuming that the lease term is renewed, is appropriate given the inherentuncertainties with a product such as Imagify, which has not yet completed itsphase 3 clinical trials and requires regulatory approvals before it can bemarketed.  The Risk Factors included under Section 1A of thisdocument discuss the uncertainties associated with Imagify.

*AccruedExpenses.*   As part of the process of preparingconsolidated financial statements we are required to estimate accrued expenses.This process involves identifying services which have been performed on ourbehalf and estimating the level of service performed and the associated costincurred for such service as of each balance sheet date in our consolidatedfinancial statements. Examples of estimated expenses for which we accrueinclude professional service fees, such as lawyers and accountants, andcontract service fees such as amounts paid to clinical monitors, datamanagement organizations and investigators in conjunction with clinical trials,and fees paid to consultants used in the qualification of our commercialmanufacturing facility for Imagify. In connection with such service fees, ourestimates are most affected by our understanding of the status and timing ofservices provided relative to the actual levels of services incurred by suchservice providers. The majority of our service providers invoice us monthly inarrears for services performed. In the event that we do not identify certaincosts which have begun to be incurred or we under- or over-estimate the levelof services performed or the costs of such services, our reported expenses forsuch period would be too low or too high. The date on which certain servicescommence, the level of services performed on or before a given date and thecost of such services are often judgmental. We make these judgments based uponthe facts and circumstances known to us in accordance with accountingprinciples generally accepted in the United States of America.

*Stock-BasedCompensation and Other Equity Instruments.  * Weaccount for stock-based compensation in accordance with the fair valuerecognition provisions of FAS 123R. Under FAS 123R, stock-basedcompensation cost is measured at the grant date based on the value of the awardand is recognized as expense over the appropriate vesting period. Determiningthe fair value of stock-based awards at the grant date requires judgment,including estimating the expected term of stock options, the expectedvolatility of our stock and expected dividends. In addition, judgment isrequired in estimating the amount of stock-based awards that are expected to beforfeited. If actual results differ significantly from these estimates ordifferent key assumptions were used, it could have a material effect on ourConsolidated Financial Statements. See Note 3 of the Notes to theConsolidated Financial Statements for additional information regardingstock-based compensation expense.

Prior to adopting theprovisions of FAS 123R, we recorded estimated compensation expense for employeestock options based upon their intrinsic value on the date of grant pursuant toAccounting Principles Board Opinion 25 (“APB 25”), “*Accountingfor Stock Issued to Employees*” and provided the required pro formadisclosures of FAS 123. Because we established the exercise price based on thefair market value of our stock at the date of grant, the stock options had nointrinsic value upon grant, and therefore no estimated 

27

----

expense was recordedprior to adopting FAS 123R. Each accounting period, we reported the potentialdilutive impact of stock options in its diluted earnings per common share usingthe treasury-stock method.

*DerivativeLiabilities.  * The terms of our February 2005convertible preferred stock offering and our March 2005 MassDevelopmentloan agreement contain features considered to be embedded derivatives which arerecorded at estimated fair value in accordance with Statement of FinancialAccounting Standards No. 133, “*Accounting for DerivativeInstruments”* (SFAS 133). The estimation of this fair value includesvarious assumptions and estimates, including assumptions and estimates of riskfree interest rates, stock price volatility and the timing of future preferredstock conversions. Changes in these estimates and assumptions can increase ordecrease the value of this derivative liability.  Changes in the fairvalue of the derivative financial instrument are included in other income(expense). The convertible preferred stock terms include a dividend make-wholepayment provision, which has been initially recorded at its estimated fair value.This derivative liability is reduced upon conversion of the preferred stock aswell as dividends declared by our board of directors, if any. TheMassDevelopment loan agreement includes a provision for a retroactive interestrate increase in the event that we achieve certain defined positive operatingcash flows. The initial fair value of the MassDevelopment loan derivative isbeing amortized over a term beginning with the loan agreement effective dateand ending with the estimated payment date of the retroactive interest. Thefair value of both derivative liabilities are re-measured at each reportingperiod.

*IncomeTaxes.  * As part of the process of preparing ourconsolidated financial statements we are required to estimate our income taxesin each of the jurisdictions in which we operate. This process involves usestimating our actual current tax exposure together with assessing temporarydifferences resulting from differing treatments of items for tax and accountingpurposes. These differences result in deferred tax assets and liabilities. Inaddition, as of December 31, 2005, we had federal tax net operating losscarryforwards of $53.6 million, which expire through 2024. We also haveresearch and development credit carryforwards of $6.1 million. We haverecorded a valuation allowance to fully offset against these otherwiserecognizable net deferred tax assets due to the uncertainty surrounding thetiming of the realization of the tax benefit. In the event that we determine inthe future that we will be able to realize all or a portion of its net deferredtax benefit, an adjustment to deferred tax valuation allowance would increasenet income in the period in which such a determination is made. The U.S. Tax Codecontains provisions that may limit the utilization of net operating losscarryforwards and credits available to be used in any given year in the eventof significant changes in ownership interest, as defined.

**New Accounting Pronouncements**

In July 2006, the FASB issued Interpretation No. (FIN)48, “*Accounting for Uncertainty in IncomeTaxes*,” which is effective January 1, 2007. The purpose of FIN 48 isto clarify and set forth consistent rules for accounting for uncertain taxpositions in accordance with SFAS 109, “*Accountingfor Income Taxes*” by requiring the application of a “more likelythan not” threshold for the recognition and derecognition of tax positions. Weare currently assessing what impact, if any, the adoption of this statementwill have on its consolidated financial statements.

In September 2006, FASBissued SFAS (FAS) No. 157, “*Fair ValueMeasurements*,” which is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years. The purpose of FAS 157 is to clarify and set forthconsistent rules for defining fair value, establishing a framework formeasuring fair value in generally accepted accounting principles and expandingdisclosures about fair value measurements. FAS 157 applies under otheraccounting pronouncements that require or permit fair value measurements wherethose accounting pronouncements have determined that fair value is the relevantmeasurement attribute. FAS 157 does not require any new fair valuemeasurements, but for some entities the application of FAS 157 could changecurrent practice.  We are currentlyassessing what impact, if any, the adoption of this statement will have on itsconsolidated financial statements.

In September 2006, theSEC issued Staff Accounting Bulletin No. (SAB) 108. The purpose of SAB 108 isto clarify and set forth consistent rules for the consideration of the effectsof prior year misstatements in quantifying current year misstatements for thepurpose of a materiality assessment. We do not believe the adoption of SAB 108will have a material impact on its consolidated financial statements.

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We have not usedderivative financial instruments for speculative or trading purposes. However,we are exposed to market risk related to changes in interest rates. Our currentpolicy is to maintain an investment portfolio consisting mainly of U.S. moneymarket and government-grade securities, directly or through managed funds, withmaturities of one year or less. Our cash is deposited in and invested throughhighly rated financial institutions in North America. Our short-terminvestments are subject to interest rate risk and will fall in value if marketinterest rates increase. If market interest rates were to increase immediatelyand uniformly by 10% from levels at September 30, 2006, we estimate that thefair value of our investment portfolio would decline by an immaterial amount.We 

28

----

currently have theability to hold our fixed income investments until maturity, and therefore wedo not expect our operating results or cash flows to be affected to anysignificant degree by the effect of a change in market interest rates on ourinvestments. Our equipment loans and capital leases are not subject to interestrate fluctuations because the interest rates are fixed at the time ofborrowing.

**Effectsof Inflation**

Our assets are primarilymonetary, consisting of cash, cash equivalents and short-term investments.Because of their liquidity, these assets are not directly affected by inflation.We also believe that we have intangible assets in the value of our technology.In accordance with generally accepted accounting principles, we have notcapitalized the value of this intellectual property on our consolidated balancesheet. Due to the nature of this intellectual property, we believe that theseintangible assets are not affected by inflation. Because we intend to retainand continue to use our equipment, furniture and fixtures and leaseholdimprovements, we believe that the incremental inflation related to replacementcosts of such items will not materially affect our operations. However, therate of inflation affects our expenses, such as those for employee compensationand contract services, which could increase our level of expenses and the rateat which we use our resources.

**ITEM4. CONTROLS AND PROCEDURES**

**Evaluationof Disclosure Controls and Procedures**

As of September 30, 2006(the “Evaluation Date”), our management, with the participation our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness of ourdisclosure controls and procedures pursuant toRule 13a-15(b) promulgated under the Securities Exchange Act of 1934,as amended (the “Exchange Act”). Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of theEvaluation Date, our disclosure controls and procedures were effective inensuring that material information required to be disclosed by us in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms, including ensuring that suchmaterial information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.

**InternalControl Over Financial Reporting**

During the period covered by this report, there have been no changes inour internal control over financial reporting that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

29

----

 

**PART II. OTHER INFORMATION**

**ITEM1. LEGAL PROCEEDINGS**

None

**ITEM1A. RISK FACTORS**

**CertainFactors Which May Affect Future Results**

*Ouroperating results and financial condition have varied in the past and may inthe future vary significantly depending on a number of factors. Except for thehistorical information in this report, the matters contained in this reportinclude forward-looking statements that involve risks and uncertainties. Thefollowing factors, among others, could cause actual results to differ materiallyfrom those contained in forward-looking statements made in this report andpresented elsewhere by management from time to time. Such factors, amongothers, may have a material adverse effect upon our business, results ofoperations and financial condition.*

*In Item 1A (“RiskFactors”) of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2005, which was filed with the Securities and Exchange Commission on March 20, 2006, we describerisk factors related to the Company.  For convenience, our updated risk factors areincluded below in this Item 1A.  Otherthan the risk factor titled “We have not generated any product revenue to date,have a history of operating losses and our capitalized resources are limited,”there have been no material changes in our risk factors fromthose disclosed in Item 1A of our Annual Report on Form 10-K for the fiscalyear ended December 31, 2005.*

**RisksRelated to Our Company**

***We have not generated any product revenue to date, have ahistory of operating losses and our capital resources are limited.***

We are focused on productdevelopment and we have not generated any revenue from commercial sales of ourproducts to date. We have incurred losses each year of our operations. In 2005,we had a net loss available to holders of common stock of $47.0 million,and in the nine months ended September 30, 2006 we had a net loss available toholders of common stock of $50.9 million. At September 30, 2006 we had anaccumulated deficit of $269.1 million. We expect our research anddevelopment, general and administrative and sales and marketing expenses willincrease over the next several years.

We expect to continue toincur losses and capital expenditures for the foreseeable future. We alsoanticipate cash out flow from debt repayment and payment of other obligations. Webelieve, based on our operating plans, that our existing resources, excludingpotential proceeds from the equity line financing available to us effectiveAugust 2006, will be adequate to fund our planned operations, includingspending necessary to complete the blinded reads of the RAMP-2 results, to mid-2007.Unless we reduce our current rate of spending, within the next twelve months wewill require significant additional funds, which we may raise through public orprivate sales of equity, or from borrowings, or from strategic partners.

As a result of ourlimited capital resources, we may elect to delay the funding of certaindevelopment activities, including those leading to the submission of our NDAfor Imagify, which would result in a delay in the commercialization of Imagify.Any such delay in the submission of an NDA or commercialization of Imagifywould have a material adverse impact on our business and would likely have a materialadverse effect on the market price of our common stock. To address our capitalneeds, we may elect to raise funds through public or private sales of equity orfrom borrowings or from strategic partners. Additional equity financing, ifavailable, may be dilutive to our stockholders; debt financing, if available,may involve significant cash payment obligations and covenants that restrictour ability to operate our business; and strategic partnerships, if available,may result in royalties or other terms which reduce our economic potential fromproducts under development. In addition, third parties may attempt to acquireus at valuations our board of directors or stockholders may not findattractive. If our capital resources are not sufficient to fund our plannedoperations for a twelve month period at the time the audit for our 2006financial results is complete, our auditor may require a going concernqualification in its audit report be included in our audit report onForm 10-K. Any such qualification may have a material adverse effect onour ability to raise capital and may have a material adverse effect on themarket price of our common stock.

***We need to allocate significant amounts of our availablecapital resources to make payments on our outstanding indebtedness andequipment lease obligations, our patent transfer agreement with ScheringAktiengesellschaft, our patent license agreement with GE and as dividends onour 6.5% convertible exchangeable preferred stock, which in turn could reduceour financial flexibility and ability to fund other activities.***

30

----

 

As of September 30, 2006, we had approximately $23.1 million inaggregate principal indebtedness outstanding related to capital leaseobligations, notes payable and other long-term obligations. As of September 30,2006, we had outstanding 730,000 shares of our 6.5% convertible exchangeablepreferred stock, which shares accrue cumulative cash dividends at the annualrate of $3.25 per share, payable quarterly on the first day of March, June,September, and December. These payments will:

·       reducethe availability of our capital to fund our clinical trials for Imagify, thequalification of our commercial manufacturing space in Tewksbury, Massachusettsand for working capital and other general corporate purposes and may requireus, in order to meet these obligations, to delay or reduce expenditures orforego business opportunities; and

·       potentiallyimpair our ability to obtain additional financing.

·       Toaddress our capital needs, we may elect to raise funds through public orprivate sales of equity or from borrowings or from strategic partners.Additional equity financing, if available, may be dilutive to our stockholders;debt financing, if available, may involve significant cash payment obligationsand covenants that restrict our ability to operate as a business; and strategicpartnerships, if available, may result in royalties or other terms which reduceour economic potential from products under development.

***Failure to obtain regulatory approvals for our productcandidates under development, in particular our lead product candidate******Imagify, would have a material adverse effect on ourbusiness.***

We must receiveregulatory approval of each of our product candidates before we cancommercialize or sell that product candidate. The pre-clinical laboratorytesting, formulation development, manufacturing and clinical trials of anyproduct candidates we develop independently or in collaboration with thirdparties, as well as the distribution and marketing of these product candidates,are regulated by numerous federal, state and local governmental authorities inthe United States, principally the FDA, and by similar agencies in othercountries. The development and regulatory approval process takes many years,requires the expenditure of substantial resources, is uncertain and subject todelays, and will thus delay our receipt of revenues, if any, from any of ourproduct candidates. We cannot assure you that our clinical trials willdemonstrate the safety and efficacy of any of our product candidates or willresult in marketable products or that the indication for use of Imagify will beas broad as we are seeking or that we will not need additional clinical trials.  No product can receive FDA approval unlesshuman clinical trials show both safety and efficacy for each target indicationin accordance with FDA standards. A number of companies in the pharmaceuticaland biotechnology industries have suffered significant setbacks in late stageclinical trials even after achieving promising results in early stagedevelopment. In our Phase 3 clinical trials for Imagify, we are seeking todemonstrate non-inferiority compared to nuclear stress tests.  In such non-inferiority trials we are also requiredto show that the comparator treatment has been performed at an acceptablelevel.  The clinical effectiveness ofnuclear stress tests may have improved since the time of our Phase 2 clinicaltrials. We therefore cannot assure you that the results from our Phase 2clinical trials for Imagify will be predictive of results obtained in our Phase3 clinical trials.

We did not achieve one ofthe primary clinical endpoints in our RAMP-1 trial.  We cannot assure youthat our RAMP-2 trial results will achieve all of its primary clinicalendpoints.  In particular, there can be no assurance that the Company’straining efforts following RAMP-1 will result in achievement of the sensitivityendpoint in RAMP-2 or that efforts to increase sensitivity will not result in failureto achieve the specificity endpoint. In addition, while it is possible that Imagifycould receive regulatory approval without achieving all of the primary clinicalendpoints for our Phase 3 clinical trials, we can provide no assurance thatsuch approval will be achieved without significant delays, without narrowing thepotential indication for use of Imagify or that it will be approved at all.

Many of the patients inour Imagify clinical trials have coronary heart disease. As part of our Imagifyclinical trials, patients are exposed to potential safety risks associated witha stress test, including risks associated with a pharmacological stressor, and Imagify.Given the nature of the Imagify clinical trials, including the cumulativeadministration of Imagify to larger numbers of at-risk patients andadministering Imagify to patients with coexisting disease, adverse events areexpected to be encountered during the clinical trials. Adverse events are alsolikely to be encountered in clinical trials for our other products, whichclinical trials may also include at-risk patients. When significant adverseevents are detected and these events are attributable to our products, suchevents could delay, limit or prevent regulatory agency approval.

Further, data obtainedfrom pre-clinical and clinical activities are subject to varyinginterpretations that could delay, limit or prevent regulatory agency approval.We cannot assure you that our Phase 3 plan for Imagify will successfullyaddress the requirements of the FDA or that the results of the Phase 3 programwill establish the safety and efficacy of Imagify sufficiently for us to obtainregulatory approval. In addition, in conjunction with approving products, it iscommon for regulatory agencies to impose limits on how such products can beused and marketed.  We anticipate that if and when Imagify and otherproduct candidates are approved that the initial use and marketing of theseproducts may be limited at least until such time as we conduct additionalclinical studies or information otherwise becomes available to address the underlyingreasons for such limits.

31

----

 

We may encounter delaysor rejections based on changes in regulatory agency policies or personnelduring the period in which we develop a drug or the period required for reviewof any application for regulatory agency approval of a particular compound. In2004, changes went into effect in the regulation of clinical trials in Europeand are currently being implemented by the individual member states of theEuropean Union. Our continuing efforts to comply with these changes could leadto delays or rejections of our clinical trials. We also may encounter delays inthe event we are unable to produce clinical trial material in sufficientquantities and of sufficient quality to meet the schedule for our plannedclinical trials. In addition, we rely on a number of third parties, such asclinical research organizations, to help support the clinical trials byperforming independent clinical monitoring, data acquisition and dataevaluations. Any failure on the part of these third parties could delay theregulatory approval process.

Failure to obtainregulatory approval or any delay or setback in obtaining regulatory agencyapprovals could:·      adversely affect our ability to market any drugs we develop independently orwith collaborative partners;·      impose additional costs and diminish any competitive advantages that we mayattain; or·      adversely affect our ability to generate royalties.

In particular, failure toobtain approval or substantial delays in obtaining approval for our leadproduct candidate, Imagify, would delay our receipt of product revenues andwould have a material adverse affect our business, financial condition andresults of operations. Our stock price would also be materially adverselyaffected.

We cannot be certain thatwe or our partners will obtain any regulatory approvals in other countries andthe failure to obtain these approvals would have a material adverse affect onour business, financial condition and results of operations. In order to marketour products outside of the United States, we and our current, and potentialfuture, collaborative partners must establish and comply with numerous andvarying regulatory requirements of other countries regarding safety andefficacy. The approval procedures vary among countries and can involveadditional product testing and additional administrative review periods. Thetime required to obtain approval in other countries might differ from thatrequired to obtain FDA approval. The regulatory approval process in othercountries may include all of the risks associated with obtaining FDA approvaldetailed above. Approval by the FDA does not ensure approval by the regulatoryauthorities of other countries. In addition, many countries outside the UnitedStates require a separate review process prior to marketing to determinewhether their national health insurance schemes will pay for newly approvedproducts, as well as the price which may be charged for a product.

***We may need to enroll more patients in additional clinicaltrials, and any such additional enrollment would require additionalexpenditures, which may be material, and would likely result in a delay of oursubmitting an NDA with the FDA for******Imagify.***

Estimations of the numberof patients needed to enroll in our clinical trials in order to achievestatistical significance were based on a variety of factors, including ourunderstanding and analysis of previous trial data for Imagify, our ongoingdiscussions with the FDA and our own knowledge and past experience in these andsimilar matters. These estimates are subject to risks and uncertainties, andthere can be no assurance that our estimates will prove to be correct, or ifadditional clinical data will be required to statistically demonstrate the safetyand efficacy of Imagify. Continued discussions with the FDA could lead to otherchanges, including changes relating to our Phase 3 program and statisticalanalysis plans. How, when or if the matters being discussed are resolved mayaffect whether Imagify is approved for the indication that we are seeking, thetiming of such approval or whether Imagify is approved at all. Thesediscussions could also lead to delays in the timing of the un-blinding of thedata from our RAMP-2 clinical trial and therefore, the public announcement ofresults from that trial. We may also encounter delays if the reading of imagesby the “blinded readers” in our RAMP-2 trial is not promptly completed, whichdelay could be caused by a variety of factors including time availability of theblinded readers.  Any such delays willlikely result in increased costs, which may be material and would likely have aharmful effect on our financial position and results of operations. The marketprice of our common stock may also be materially adversely affected in responseto any such delays.

***If we cannot raise additional capital on acceptable terms,we may be unable to complete planned clinical trials, obtain regulatoryapprovals or commercialize our product candidates.***

We will requiresubstantial future capital in order to continue to conduct the research anddevelopment, clinical and regulatory activities necessary to bring our productcandidates to market and to establish commercial manufacturing, marketing andsales capabilities. Our future capital requirements will depend on manyfactors, including:

·      the progress of pre-clinical development and laboratory testing and clinicaltrials;·      the timing of construction and size to which we expand our manufacturingcapabilities;·      the time and costs involved in obtaining regulatory approvals;·      the number of product candidates we pursue;

32

----

 

·      the costs involved in filing and prosecuting patent applications and enforcingor defending patent claims; and·      the establishment of selected strategic alliances and activities required forproduct commercialization.

We intend to seekadditional funding through strategic collaborations and may seek fundingthrough private or public sales of our securities or by licensing all or aportion of our technology. This funding may significantly dilute existingstockholders or may limit our rights to our technology.

We cannot assure you thatwe can obtain additional funding on reasonable terms, or at all. If we raiseadditional funds by issuing equity securities, our stock price may decline, ourexisting stockholders may experience significant dilution, and the newly issuedsecurities may have rights superior to those of our common stock. If we raiseadditional funds by issuing debt, we may be subject to limitations on ouroperations and such debt may have rights senior to the debentures, if issued.If we cannot obtain adequate funds, we may:

·      terminate or delay clinical trials for one or more of our product candidates;·      delay our establishment of sales, marketing and/or manufacturing capabilities;·      curtail significant product development programs that are designed to identifynew product candidates;·      relinquish rights to our technologies or product candidates; and/or·      terminate or delay qualification of our commercial manufacturing facility.

***Our products, if approved, may fail to achieve marketacceptance.***

There can be no assurancethat any products we successfully develop, if approved for marketing, willachieve market acceptance or generate significant revenues. Each of our productcandidates is intended to replace or alter existing therapies or procedures, andhospitals, physicians or patients may conclude that these products are lesssafe or effective or otherwise less attractive than these existing therapies orprocedures. For example, our lead product candidate, Imagify, is a contrastagent for use in ultrasound imaging procedures which will compete with existingnuclear imaging and stress echocardiography. Hospitals, physicians or patientsmay prefer these existing procedures to Imagify enhanced ultrasound imaging. Ifour products do not receive market acceptance for any reason, it wouldadversely affect our business, financial condition and results ofoperations.  It could also result in theneed for additional clinical trials intending to demonstrate the effectivenessof Imagify in circumstances not studied in our Phase 3 clinical trials. Further,our competitors may develop new technologies or products that are moreeffective or less costly, or that seem more cost-effective, than our products.We can give no assurance that hospitals, physicians, patients or the medicalcommunity in general will accept and use any products that we may develop.

***We have never manufactured any of our product candidates incommercial quantities, and if we fail to develop an effective manufacturingcapability for our products, including our lead product candidate******Imagify, we may be unable to commercialize theseproducts.***

We have no experience inmanufacturing our products for commercial use and limited experience indesigning equipment for the manufacture of our products. We are working tostart-up and qualify operations at a commercial manufacturing facility inTewksbury, Massachusetts and to demonstrate that we can produce Imagify at acommercial manufacturing scale prior to our filing of a NDA for Imagify and,subject to required regulatory approvals, we intend to manufacture Imagify inthis facility for commercial use. We can not assure you that we will be able tosuccessfully manufacture our products in sufficient quantities for commercialsale, or obtain the necessary regulatory approvals for such commercialmanufacture, at all or in a timely or economical manner. Our intention tomanufacture Imagify or other products exposes us to the following risks, any ofwhich could delay or prevent the approval of our products by the FDA orcorresponding state and foreign agencies, or the commercialization of ourproducts, or result in higher costs or inability to meet demand for Imagifyleading to potential revenue loss, and any of which would have a materialadverse impact on our business, financial condition and results of operations.

·      Manufacturers often encounter difficulties in achieving volume production,quality control and quality assurance. Accordingly, we might not be able tomanufacture sufficient quantities of drugs to meet our clinical schedules or tocommercialize our products.

·      Manufacturers are obliged to manufacture in highly controlled environments andto operate in accordance with FDA and international mandated current goodmanufacturing practices, or cGMPs. For our clinical trials we have relied oncontract manufacturers for such facilities and cGMP compliance. InJuly 2004, we entered into a lease for a facility in Tewksbury,Massachusetts that we are in the process of qualifying as a commercialmanufacturing facility for Imagify. Creation and

33

----

 

qualification of a commercial manufacturing environment requiressignificant expertise and capital resources, including the development ofadvanced manufacturing techniques and process controls and is subject to localand state planning approvals. Manufacturers of pharmaceutical products oftenencounter difficulties in constructing and qualifying new manufacturingfacilities and in production, especially in scaling-up initial production. Afailure within this new facility to establish and follow cGMPs and to documentadherence to such practices may lead to significant delays in the availabilityof material for our NDA filing or commercial production for Imagify and maydelay or prevent filing or approval of marketing applications for our productsor the ability to continue to manufacture the products. Certain of these delayswould further require us to continue to operate this facility and incur relatedcosts.

·      Manufacture of our product candidates, in preparation for filing a NDA and forcommercial production, will each initially require and rely on a singlecommercial manufacturing site, directly or through a contract manufacturer,without the backup of a second site that is qualified for commercialmanufacture of the product. Qualification of another manufacturing site can beexpensive and time consuming. Prior to using product from a new manufacturingsite, we must demonstrate to the FDA and corresponding state and foreignagencies that the specifications for the product are consistent with thespecifications for the product as it was manufactured at a prior qualified siteor we must clinically or otherwise demonstrate that the safety and efficacy ofthe product produced in the new manufacturing site is consistent with theproduct as it was manufactured at the prior site. Demonstrating suchconsistency may be difficult, expensive or time consuming. In addition, beforewe would be able to produce product for commercial use at a new facility, itwill have to undergo a pre-approval inspection by the FDA and correspondingstate and foreign agencies. Once approved, drug manufacturers are subject toongoing periodic unannounced inspection by the FDA and corresponding state andforeign agencies to ensure strict compliance with cGMPs, other governmentregulations and corresponding foreign standards. Failure to maintain compliancewith cGMP or with safety or environmental regulations could result inpenalties, product recalls or restrictions on the use of the manufacturingsite.

Under the terms of ourcollaboration agreement with Nycomed, we are responsible for the commercialmanufacture of Imagify for marketing and sale by Nycomed in Europe. Failure tomanufacture Imagify in a timely manner or on an economic basis, or insufficient quantities, could jeopardize our relationship with Nycomed. We donot currently have a European sales force, nor do we have experience withregard to the commercialization, marketing, sale or distribution ofpharmaceutical products in Europe, and we rely entirely on Nycomed for thisexpertise. Any termination of our relationship with Nycomed would have amaterial adverse impact on our business, financial condition and results ofoperations.

***We may not be able to manufacture our products in commercialquantities, which would prevent us from marketing our products.***

To date our productcandidates have been manufactured in small quantities for pre-clinical andclinical trials. If any of these product candidates are approved by the FDA orforeign regulatory authorities for commercial sale, we will need to manufacturethem in larger quantities. For Imagify, it is our intention to seek regulatoryapproval after we have demonstrated that we can manufacture Imagify at a largerbatch scale than is being used for clinical trial materials. We cannot assureyou that we will be able to successfully increase the manufacturing capacity ormanufacture at a larger batch scale, whether on our own or in collaborationwith third party manufacturers, for any of our product candidates in a timelyor economic manner, or at all. Significant scale-up of manufacturing mayrequire certain additional validation studies, which the FDA must review andapprove. If we are unable to successfully increase the manufacturing capacityfor a product candidate, the regulatory approval or commercial launch of thatproduct candidate may be delayed or there may be a shortage in supply of thatproduct candidate. Our product candidates require precise, high-qualitymanufacturing. Our failure to achieve and maintain these high manufacturingstandards, including controlling the incidence of manufacturing errors andmaintaining reliable product packaging for diverse environmental conditions,could result in patient injury or death, product recalls or withdrawals, delaysor failures in product testing or delivery, cost overruns or other problemsthat could seriously hurt our business.

Our commercialmanufacturing facility in Tewksbury, Massachusetts is designed to meet our estimatedinitial commercial demand for Imagify. The facility is being initially equippedto run one production line. In order to support greater production capacity,this production line is designed to support a larger lyophilizer(pharmaceutical freeze dryer which can be operated under sterile conditions)than has been initially installed in the facility. Purchasing, installing andqualifying manufacturing equipment, such as a lyophilizer, typically requiressignificant lead times and temporary discontinuation of production. Also in thefuture we may need to add additional production lines at the Tewksbury,Massachusetts site or elsewhere to meet potential commercial demand for Imagify.We have made no commitment to such additions at this time. The cost of suchadditions can be significant. There can be no assurance that our capacity estimateswill be achieved. Any such additions would increase our operating spending,increase our capital requirements and reduce our resources available fordevelopment activities.

34

----

 

***We have removed our******Imagify manufacturing equipment from the facilitiesof our third party contract manufacturer and currently have no facility withinwhich to manufacture Imagify until the new commercial manufacturing facility isqualified or until other arrangements are made.***

We have removed our Imagifymanufacturing equipment from the facilities of a third-party contractmanufacturer.  Currently, we have nofacility within which to manufacture Imagify until the new commercialmanufacturing facility is qualified or until other arrangements are made. Wehave a limited inventory of Imagify on-hand and the shelf life of this existingsupply is anticipated to expire during 2007. If we lack sufficient inventory ofImagify clinical trial material to perform clinical trials or are unable tomanufacture sufficient inventory on a timely basis, our program could be adverselyimpacted or delayed. These delays could have a material adverse effect on ourbusiness, financial condition and results of operations.

***If third-party manufacturers of our products fail to devotesufficient time and resources to our concerns, or if their performance issubstandard, our clinical trials may be delayed and our costs may rise.***

We may rely substantiallyon third-party contract manufacturers to supply, store and distribute ourpotential products for our clinical trials and other development needs. Ourreliance on these third-party manufacturers will expose us to the followingrisks, any of which could delay or prevent the completion of our clinicaltrials, the approval of our products by the FDA, or the commercialization ofour products, result in higher costs, or deprive us of additional productcandidates, and any of such effects would have a material adverse impact on ourbusiness, financial condition and results of operations.

·      Contract manufacturers often encounter difficulties in achieving volumeproduction, quality control and quality assurance, as well as shortages ofqualified personnel. Accordingly, a manufacturer might not be able tomanufacture sufficient quantities of drugs to meet our clinical schedules.

·      Contract manufacturers are obliged to operate in accordance with FDA-mandatedcurrent good manufacturing practices, or cGMPs. A failure of these contractmanufacturers to establish and follow cGMPs and to document their adherence tosuch practices may lead to significant delays in the availability of materialfor clinical study and may delay or prevent filing or approval of marketingapplications for our products.

·      For production of clinical trial material for each of our current product candidateswe will initially rely on a single manufacturer. Changing these or futuremanufacturers may be difficult and the number of potential manufacturers islimited. Changing manufacturers may require re-validation of the manufacturingprocesses and procedures in accordance with FDA-mandated cGMPs. Suchre-validation may be costly and time-consuming. It may be difficult orimpossible for us to find replacement manufacturers on acceptable termsquickly, or at all.

·      Our contract manufacturers may not perform as agreed or may not remain in thecontract manufacturing business for the time required to produce, store anddistribute our products successfully. Our manufacturing levels, while importantto us, can represent relatively small fractions of the overall business of mostqualified contract manufacturers. As a result, the contract manufacturers maynot provide us with the attention that we need or may be unwilling to adapt tonecessary changes in our manufacturing requirements.

Drug manufacturers aresubject to ongoing periodic unannounced inspection by the FDA and correspondingstate and foreign agencies to ensure strict compliance with cGMPs, othergovernment regulations and corresponding foreign standards. While we areobligated to audit the performance of third party contractors, we do not havecontrol over our third-party manufacturers’ compliance with these regulationsand standards. Failure by our third-party manufacturers or us to comply withapplicable regulations could result in sanctions being imposed on us, includingfines, injunctions, civil penalties, failure of the government to grant marketapproval of drugs, delays, suspension or withdrawal of approvals, seizures orrecalls of product, operating restrictions and criminal prosecutions, any ofwhich could significantly and adversely affect our business.

***Materials necessary to manufacture our products may not beavailable, which may delay our development and commercialization activities.***

Only a few facilitiesmanufacture some of the raw materials necessary to manufacture our products. Ifwe need to purchase a raw material that is in limited supply for our clinicaltrials, or for commercial distribution if we obtain marketing approval of aproduct candidate, we cannot assure you that one or more suppliers would beable to sell us that raw material at the time we need it and on commerciallyreasonable terms. If we change suppliers for any of these materials or any ofour suppliers experiences a shutdown or disruption in the facilities used toproduce these materials, due to technical, regulatory or other problems, itcould harm our ability to

35

----

 

manufacture our products.Our inability to obtain required raw materials for any reason couldsubstantially impair our development activities or the production, marketingand distribution of our products.

***We have no experience selling, marketing or distributing ourproducts and no internal capability to do so.***

If we receive regulatoryapproval to commence commercial sale of any product, we will face competitionwith respect to commercial sales, marketing and distribution. These are areasin which we have no experience. To market any of our products directly, we mustdevelop a direct marketing and sales force with technical expertise andsupporting distribution capability. Alternatively, we may engage apharmaceutical or other healthcare company with an existing distribution systemand direct sales force to assist us. There can be no assurance that we willsuccessfully establish sales and distribution capabilities either on our own orin collaboration with third parties or gain market acceptance for our products.To the extent we have or will enter co-promotion or other licensingarrangements, any revenues we receive will depend on the efforts of thirdparties and there can be no assurance that our efforts will succeed.

***Claims by other parties that we infringe or havemisappropriated their proprietary technology may result in liability fordamages, royalties, or other payments, or stop our development andcommercialization efforts.***

Competitors and otherthird parties may initiate patent litigation against us in the United States orin foreign countries based on existing patents or patents that may be grantedin the future. Many of our competitors have obtained patents covering productsand processes generally related to our products and processes, and they mayassert these patents against us. Moreover, there can be no assurance that thesecompetitors have not sought or will not seek additional patents that may coveraspects of our technology. As a result, there is a greater likelihood of apatent dispute than would be expected if our competitors were pursuingunrelated technologies.

While we conduct patentsearches to determine whether the technologies used in our products infringepatents held by third parties, numerous patent applications are currentlypending and may be filed in the future for technologies generally related toour technologies, including many patent applications that remain confidentialafter filing. Due to these factors and the inherent uncertainty in conductingpatent searches, there can be no guarantee that we will not violate third-partypatent rights that we have not yet identified.

We know of U.S. andforeign patents issued to third parties that relate to aspects of our productcandidates. There may also be patent applications filed by these or otherparties in the United States and various foreign jurisdictions that relate tosome aspects of our product candidates, which, if issued, could subject us toinfringement actions. In particular, we are aware of U.S. and foreign patentsowned by third parties, including potential competitors, which arguably coveraspects of our Imagify contrast agent. We and several of these parties havebeen actively engaged in opposing the grant of European patents with claimsthat arguably cover aspects of our Imagify product. Parties may contest patentsin Europe prior to contesting the counterpart patents in the United Statesbecause of procedural differences between European and U.S. patent laws as wellas economic considerations.

The owners or licenseesof these and other patents may file one or more infringement actions againstus. In addition, a competitor may claim misappropriation of a trade secret byan employee hired from that competitor. Any such infringement ormisappropriation action could cause us to incur substantial costs defending thelawsuit and could distract our management from our business, even if the allegationsof infringement or misappropriation are unwarranted. A need to defend multipleactions or claims could have a disproportionately greater impact. In addition,either in response to or in anticipation of any such infringement ormisappropriation claim, we may enter into commercial agreements with the ownersor licensees of these rights. The terms of these commercial agreements mayinclude substantial payments, including substantial royalty payments onrevenues received by us in connection with the commercialization of ourproducts.

Payments under suchagreements could increase our operating losses and reduce our resourcesavailable for development activities. Furthermore, a party making this type ofclaim could secure a judgment that requires us to pay substantial damages,which would increase our operating losses and reduce our resources availablefor development activities. A judgment could also include an injunction orother court order that could prevent us from making, using, selling, offering forsale or importing our products or prevent our customers from using ourproducts. If a court determined or if we independently concluded that any ofour products or manufacturing processes violated third-party proprietaryrights, our clinical trials could be delayed and there can be no assurance thatwe would be able to reengineer the product or processes to avoid those rights,or to obtain a license under those rights on commercially reasonable terms, ifat all.

36

----

 

***If we are unable to protect our intellectual propertyrights, our competitors may develop and market products with similar featuresthat may reduce demand for our products, and we may be prevented fromestablishing collaborative relationships on favorable terms.***

The following factors areimportant to our success:

·      receiving patent protection for our product candidates;·      maintaining our trade secrets;·      not infringing on the proprietary rights of others; and·      preventing others from infringing our proprietary rights.

We will be able toprotect our proprietary rights from unauthorized use by third parties only tothe extent that our proprietary rights are covered by valid and enforceablepatents or are effectively maintained as trade secrets.  We try to protect our proprietary position byfiling U.S. and foreign patent applications related to our proprietarytechnology, inventions and improvements that are important to the developmentof our business. Because the patent position of pharmaceutical companiesinvolves complex legal and factual questions, the issuance, scope andenforceability of patents cannot be predicted with certainty. Patents, ifissued, may be challenged, invalidated or circumvented. Thus, any patents thatwe own or license from others may not provide any protection againstcompetitors. Our pending patent applications, those we may file in the future,or those we may license from third parties, may not result in patents beingissued. If issued, they may not provide us with proprietary protection orcompetitive advantages against competitors with similar technology.Furthermore, others may independently develop similar technologies or duplicateany technology that we have developed. The laws of many foreign countries donot protect our intellectual property rights to the same extent as do the lawsof the United States.

We also rely on tradesecrets, know-how and technology, which are not protected by patents, tomaintain our competitive position. We try to protect this information byentering into confidentiality agreements with parties that have access to it,such as our corporate partners, collaborators, employees and consultants. Anyof these parties may breach the agreements and disclose our confidentialinformation or our competitors might learn of the information in some otherway. If any trade secret, know-how or other technology not protected by apatent were to be disclosed to or independently developed by a competitor, ourbusiness and financial condition could be materially adversely affected.

***We may become involved in lawsuits and administrativeproceedings to protect, defend or enforce our patents that would be expensiveand time consuming.***

In order to protect orenforce our patent rights, we may initiate patent litigation against thirdparties in the United States or in foreign countries. In addition, we have beenand continue to be subject to certain opposition proceedings conducted inpatent and trademark offices challenging the validity of our patents and maybecome involved in future opposition proceedings. The defense of intellectualproperty rights, including patent rights through lawsuits, interference oropposition proceedings, and other legal and administrative proceedings can becostly and can divert our technical and management personnel from their normalresponsibilities. Such costs increase our operating losses and reduce ourresources available for development activities. An adverse determination of anylitigation or defense proceedings could put one or more of our patents at riskof being invalidated or interpreted narrowly and could put our patentapplications at risk of not issuing.

Furthermore, because ofthe substantial amount of discovery required in connection with intellectualproperty litigation, there is a risk that some of our confidential informationcould be compromised by disclosure during this type of litigation. For example,during the course of this kind of litigation and despite protective ordersentered by the court, confidential information may be inadvertently disclosed inthe form of documents or testimony in connection with discovery requests,depositions or trial testimony. This disclosure could materially adverselyaffect our business and financial results.

***If we are unable to retain key personnel and hire additionalqualified scientific, manufacturing, sales and marketing, and other personnel,we may not be able to successfully achieve our goals.***

We depend on theprincipal members of our scientific and management staff. The loss of theseprincipal members’ services might significantly delay or prevent theachievement of research, development or business objectives and couldmaterially adversely affect our business, financial condition and results ofoperations. We do not maintain key person life insurance on any of theseprincipal members.  On February 1, 2006, we entered into executiveemployment agreements with key members of the management team that

37

----

 

provide for compensationand other benefits in the event these persons are terminated other than forcause, including in connection with a “change of control” of Acusphere.

Our success depends, inlarge part, on our ability to attract and retain qualified scientific andmanagement personnel such as these individuals. We face intense competition forsuch personnel and consultants. We cannot assure you that we will attract andretain qualified management and scientific personnel in the future.

Further, we expect thatour potential expansion into areas and activities requiring additionalexpertise, such as further clinical trials, governmental approvals, commercialmanufacturing and marketing, will place additional requirements on ourmanagement, operational and financial resources. We expect these demands willrequire an increase in management and scientific personnel and the developmentof additional expertise by existing management personnel. The failure toattract and retain such personnel or to develop such expertise could materiallyadversely affect prospects for our success.

***We will establish collaborative relationships, and thoserelationships may expose us to a number of risks.***

We will rely on a numberof significant collaborative relationships with pharmaceutical or otherhealthcare companies for our manufacturing, research funding, clinicaldevelopment and/or sales and marketing performance. Reliance on collaborativerelationships poses a number of risks, including the following:

·      wecannot effectively control whether our corporate partners will devotesufficient resources to our programs or product candidates;·      disputesmay arise in the future with respect to the ownership of rights to technologydeveloped with collaborators;·      disagreementswith collaborators could delay or terminate the research and development,regulatory approval or commercialization of product candidates, or result inlitigation or arbitration;·      corporatepartners may have considerable discretion in electing whether to pursue thedevelopment of any additional product candidates and may pursue technologies orproducts either on their own or in collaboration with our competitors; and·      collaboratorswith marketing rights may choose to devote fewer resources to the marketing ofour product candidates than they do to product candidates of their owndevelopment.

In July 2004, weentered into a collaboration, license and supply agreement with Nycomed inwhich we granted Nycomed rights to develop and market Imagify in Europe. Therecan be no assurance that the regulatory goals, sales targets and otherobjectives of this agreement will be achieved. Failure to achieve these goals,targets and objectives would result in our inability to receive license,milestone, royalty and other payments under this agreement, which would have amaterial adverse impact on our business, financial condition and results ofoperations including, under certain conditions, reduction of royalty rates,delays in regulatory approvals and product sales, penalties and termination ofthe agreement. Under certain provisions of this collaboration agreement, if wefail in any material respect to use all commercially reasonable efforts tocarry out referenced obligations under the agreement, we would be obligated topay Nycomed liquidated damages of up to $12 million. Although we plan tocarry out all of these obligations, which we believe are in our control, therecan be no assurance that termination of this agreement will not occur or thatsuch termination would not result in us incurring liquidated damages of up to$12 million.

Given these risks, ourcurrent and future collaborative efforts may not be successful. Failure ofthese efforts could delay our product development or impair commercializationof our products, and could have a material adverse effect on our business,financial condition and results of operations.

***Competition in the pharmaceutical industry is intense, andif we fail to compete effectively our financial results will suffer.***

We engage in a businesscharacterized by extensive research efforts, rapid developments and intensecompetition. We cannot assure you that our products will compete successfullyor that research and development by others will not render our productsobsolete or uneconomical. Our failure to compete effectively would materiallyadversely affect our business, financial condition and results of operations.We expect that successful competition will depend, among other things, onproduct efficacy, safety, reliability, availability, timing and scope ofregulatory approval and price. Specifically, we expect important factors willinclude the relative speed with which we can develop products, complete theclinical, development and laboratory testing and regulatory approval processesand supply commercial quantities of the product to the market.

38

----

 

We expect competition toincrease as technological advances are made and commercial applicationsbroaden. In commercializing our initial product candidates and any additionalproducts we develop using our HDDS and PDDS technologies, we will facesubstantial competition from large pharmaceutical, biotechnology and othercompanies, universities and research institutions.

·      Imagify, our ultrasound contrast agent and lead product candidate, if approvedfor marketing and sale, will compete with nuclear stress tests, the currentstandard of care in myocardial perfusion imaging. Nuclear contrast agents thatare approved for use in myocardial perfusion imaging include products marketedby GE Healthcare and Bristol-Myers Squibb. In 2004, the cost of a nuclearstress test was approximately $770 per procedure. In addition, GE Healthcareand Bristol-Myers Squibb have developed and marketed ultrasound contrast agentsthat have been used for Left Ventricular Opacification and Endocardial BorderDelineation in patients with suboptimal images. We are aware that other companies are developing ultrasound contrastagents for wall imaging and for radiology applications. Point Biomedical isdeveloping an ultrasound contrast agent for echocardial contrast imaging, namedCardioSphere and during 2006 filed a NDA for CardioSphere with the FDA.  Also, some cardiologists may find itsatisfactory to use stress echo without contrast for the detection of coronaryheart disease.

·      AI-850, our reformulation of paclitaxel, if approved for marketing and sale,will also face intense competition from companies such as AmericanPharmaceutical Partners, NeoPharm and Sonus Pharmaceuticals (in partnershipwith Schering AG), which are applying significant resources and expertise todeveloping reformulations of paclitaxel for intravenous delivery. AmericanPharmaceutical Partners has received FDA approval and is selling their product.Other companies, such as Cell Therapeutics, are developing new chemicalentities that involve paclitaxel conjugated, or chemically bound, to anotherchemical.

·      AI-128, our sustained release formulation of an asthma drug, if approved formarketing and sale, will also face intense competition. Companies such asAlkermes possess technology that may be suitable for sustained releasepulmonary drug delivery and may have competitive programs that have not beenpublicly announced or may decide to begin such programs in the future. Inaddition, large pharmaceutical companies that market FDA-approved asthma drugsmay be developing sustained release versions of their asthma drugs that wouldcompete with our product candidates.

Relative to us, most ofour competitors have substantially greater capital resources, research anddevelopment staffs, facilities and experience in conducting clinical trials andobtaining regulatory approvals, as well as in manufacturing and marketingpharmaceutical products. Many of our competitors may achieve productcommercialization or patent protection earlier than we will.  Furthermore, we believe that some of ourcompetitors have used, and may continue to use, litigation to gain acompetitive advantage. Finally, our competitors may use different technologiesor approaches to the development of products similar to the products we areseeking to develop.

***We expect to develop international operations that willexpose us to additional business risks.***

We expect, whetherdirectly or through collaborative relationships, to develop operations outsidethe United States in order to market and distribute our products. Regardless ofthe extent to which we seek to develop these operations ourselves or incollaboration with others, we cannot be sure that our international effortswill be successful. Any expansion into international markets will requireadditional resources and management attention and will subject us to newbusiness risks. These risks could lower the prices at which we can sell ourproducts or otherwise have an adverse effect on our operating results. Amongthe risks we believe are most likely to affect any international operationsare:

·      different regulatory requirements for approval of our product candidates;·      dependence on local distributors;·      longer payment cycles and problems in collecting accounts receivable;·      adverse changes in trade and tax regulations;·      the absence or significant lack of legal protection for intellectual propertyrights;·      political and economic instability; and·      currency risks.

39

----

 

**RisksRelated to Our Industry**

***Even if we obtain marketing approval, our products will be subjectto ongoing regulatory review.***

If regulatory approval ofa product is granted, such approval may be subject to limitations on theindicated uses for which the product may be marketed or contain requirementsfor costly, post-marketing follow-up studies. As to products for whichmarketing approval is obtained, the manufacturer of the product and themanufacturing facilities will be subject to continual review and periodicinspections by the FDA and other regulatory authorities. In addition, the labeling,packaging, adverse event reporting, storage, advertising, promotion and recordkeeping related to the product will remain subject to extensive regulatoryrequirements. The subsequent discovery of previously unknown problems with theproduct, manufacturer or facility may result in restrictions on the product orthe manufacturer, including withdrawal of the product from the market. We maybe slow to adapt, or we may never adapt, to changes in existing requirements oradoption of new requirements or policies.

If we fail to comply withapplicable regulatory requirements, we may be subject to fines, suspension orwithdrawal of regulatory approvals, product recalls, seizure of products,operating restrictions and criminal prosecution.

***Market acceptance of our products will be limited if usersof our products are unable to obtain adequate reimbursement from third-partypayors.***

Government healthadministration authorities, private health insurers and other organizationsgenerally provide reimbursement for products like our product candidates, andour commercial success will depend in part on these third-party payors agreeingto reimburse patients for the costs of our products. Even if we succeed inbringing any of our proposed products to market, we cannot assure you thatthird-party payors, in the United States, Europe and other markets that we maypursue, will consider our products cost-effective or provide reimbursement inwhole or in part for their use or agree to the proposed price.

Significant uncertaintyexists as to the reimbursement status of newly approved health care products.Each of our product candidates is intended to replace or alter existingtherapies or procedures. These third-party payors may conclude that ourproducts are less safe, effective or cost-effective than these existingtherapies or procedures. Therefore, third-party payors may not approve ourproducts for reimbursement.

If third-party payors donot approve our products for reimbursement or fail to reimburse themadequately, sales will suffer as some physicians or their patients will opt fora competing product that is approved for reimbursement or is adequatelyreimbursed. Even if third-party payors make reimbursement available, thesepayors’ reimbursement policies may adversely affect the ability of us and ourpotential collaborators to sell our products on a profitable basis.

Moreover, the trendtoward managed healthcare in the United States, the growth of organizationssuch as health maintenance organizations, and legislative proposals to reformhealthcare and government insurance programs could significantly influence thepurchase of healthcare services and products, resulting in lower prices andreduced demand for our products which could adversely affect our business,financial condition and results of operations.

In addition, legislationand regulations affecting the pricing of pharmaceuticals may change in waysadverse to us before or after the FDA or other regulatory agencies approve anyof our proposed products for marketing. While we cannot predict the likelihoodof any of these legislative or regulatory proposals, if any government orregulatory agencies adopt these proposals they could materially adverselyaffect our business, financial condition and results of operations.

***We may be required to defend lawsuits or pay damages inconnection with the alleged or actual harm caused by our products or productcandidates.***

We face an inherentbusiness risk of exposure to product liability claims in the event that the useof our products is alleged to have resulted in harm to others. This risk existsin clinical trials as well as in commercial distribution. In addition, thepharmaceutical and biotechnology industries in general have been subject tosignificant medical malpractice litigation. We may incur significant liabilityif product liability or malpractice lawsuits against us are successful.Furthermore, product liability claims, regardless of their merits, could becostly and divert our management’s attention from other business concerns, oradversely affect our reputation and the demand for our products. Although wemaintain product liability insurance, we cannot be certain that this coveragewill be adequate or that it will continue to be available to us on acceptableterms.

40

----

 

***Rapid technological change could make our products obsolete.***

Pharmaceuticaltechnologies have undergone rapid and significant change. We expect thatpharmaceutical technologies will continue to develop rapidly. Our future willdepend in large part on our ability to maintain a competitive position withrespect to these technologies. Any compounds, products or processes that wedevelop may become obsolete before we recover any expenses incurred inconnection with their development. Rapid technological change could make ourproducts obsolete, which could materially adversely affect our business,financial condition and results of operations.

***Our products involve the use of hazardous materials, and asa result we are exposed to potential liability claims and to costs associatedwith complying with laws regulating hazardous waste.***

Our research anddevelopment activities involve the use of hazardous materials, includingchemicals and biological materials. We believe that our procedures for handlinghazardous materials comply with federal and state regulations. However, therecan be no assurance that accidental injury or contamination from thesematerials will not occur. In the event of an accident, we could be held liablefor any damages, which could exceed our available financial resources. Thisliability could materially adversely affect our business, financial conditionand results of operations.

We are subject tofederal, state and local laws and regulations governing the use, manufacture,storage, handling and disposal of hazardous materials and waste products, andwe spent approximately $12,600 during the three months ended September 30, 2006to dispose of these hazardous materials and waste products. We may be requiredto incur significant costs to comply with environmental laws and regulations inthe future that could materially adversely affect our business, financialcondition and results of operations.

**RisksRelated to Our Common Stock**

***We expect that our stock price will fluctuate significantly.***

We completed our initialpublic offering in October 2003. Prior to this offering, you could not buyor sell our common stock publicly. After this offering, the average dailytrading volume for our common stock has been relatively low. An active publicmarket for our common stock may not continue to develop or be sustained. Thestock market, particularly in recent years, has experienced significantvolatility particularly with respect to pharmaceutical and biotechnologystocks. The volatility of pharmaceutical and biotechnology stocks often doesnot relate to the operating performance of the companies represented by thestock. Factors that could cause this volatility in the market price of ourcommon stock include:

·      announcements of the introduction of new products by us or our competitors;·      announcements of clinical trial results;·      market conditions in the pharmaceutical and biotechnology sectors;·      rumors relating to us or our competitors;·      litigation or public concern about the safety of our potential products;·      our quarterly operating results;·      deviations in our operating results from the estimates of securities analysts;·       salesby us of additional shares of our common or preferred stock; and·      FDA or international regulatory actions.

The market price of ourcommon stock may also fluctuate in response to the exercise by us of rightsunder the terms of our 6.5% convertible exchangeable preferred stock. Forexample, we may elect to automatically convert the preferred stock if ourcommon stock price has exceeded 150% of the conversion price of the preferredstock for at least 20 trading days during a 30-day trading period ending withinfive trading days prior to the notice of automatic conversion. There is a riskof fluctuation in the price of our common stock between the time when we mayfirst elect to automatically convert the preferred stock and the automaticconversion date. These fluctuations may adversely affect the value of ourcommon stock.

***If shares under our universal shelf registrationstatement are issued, then the price of our securities may be negativelyaffected.***

We have on file with the SEC a “ universal shelf” registration statement on Form S-3(Registration No. 333-134263) and a universal shelf registration statement onForm S-3 (Registration No. 333-123854), which provide for the offer, from timeto time, of common

41

----

 

stock, preferred stock, debtsecurities and warrants up to an aggregate remaining availability ofapproximately $100.0 million and $27.0 million, respectively. The SEC declaredthe shelf registration statements effective on June 1, 2006 and April 15, 2005,respectively.  Subject to market conditions and our capital needs, and solong as we are then eligible to use the registration statement under SEC rules,we may again seek to use any remaining availability under the shelfregistration statement by making an offering of securities covered for saleunder the registration statement. In addition, we may amend our shelfregistration statement or file a new shelf registration statement to increaseour potential access to capital. The addition of these securities into themarket may be dilutive to existing stockholders and have an adverse effecton the price of our securities.

 

***Ifwe sell shares of our common stock under our equity line of credit arrangement,then the price of our securities may be negatively effected.***

 

In August 2006, we entered into what is sometimes termed an equity lineof credit arrangement with Azimuth Opportunity Ltd.  The arrangement providesthat, upon the terms and subject to the conditions set forth therein, Azimuthis committed to purchase up to $30,000,000 of our common stock, or up toapproximately 5.8 million shares of our common stock, whichever occurs first,over the 18-month term of the agreement.  From time to time during theterm of the agreement, and at our sole discretion, we may present Azimuth withdraw down notices requiring Azimuth to purchase our common stock.  The pershare purchase price for these shares will equal the daily volume weightedaverage price of the common stock on each date during the draw down period onwhich shares are purchased, less a discount ranging from 3.875% to 5.875%,based on the volume weighted average price of the common stock.  As a result,our existing common stockholders will experience immediate dilution upon thepurchase of any shares of our common stock by Azimuth under this agreement. Thesale of shares under this equity line will be dilutive to existing shareholdersand may have an adverse effect on the price of our securities.

 

***Our controlling equity holders may have conflicts ofinterests with us or you in the future.***

 

As of November 8, 2006, and based on information provided to us by suchentities: Quaker Capital Management Corporation and its affiliates beneficiallyown approximately 9% of our outstanding common stock; Bank of AmericaCorporation and its affiliates beneficially own approximately 7% of ouroutstanding common stock; the Baupost Group LLC beneficially owns approximately7% of our outstanding common stock; the Endowment Capital Group LLC and itsaffiliates beneficially own approximately 6% of our outstanding common stockand Mr. Peter David Boone beneficially owns approximately 6% of ouroutstanding common stock. Collectively these investors will controlapproximately 35% of our common stock. These investors, particularly if theywere to act together as a concentrated group, could exert influence over theelection of our directors, direct our policies and operations, including futureissuances of common stock or other securities, the payments of dividends, ifany, on our common stock, the incurrence of debt by us, amendments to ourAmended and Restated Certificate of Incorporation and Amended and RestatedBylaws and entering into of extraordinary transactions, and their interests, asa concentrated group, may not in all cases be aligned with your interests. Thisconcentration of ownership among a small number of investors may make it moredifficult for other stockholders to influence matters requiring stockholderapproval and may have the effect of delaying, preventing or deterring a changein control of our company, thereby possibly depriving our stockholders of anopportunity to receive a premium for their common stock as part of any sale oracquisition.

 

***Our common stock is junior to our preferred stock withrespect to the right to receive payments in the event of a dissolution,liquidation or winding up of Acusphere.***

In February 2005, weissued and sold 900,000 shares of our 6.5% convertible exchangeable preferredstock. As of May 9, 2006, 730,000 of these shares of preferred stock areoutstanding. The preferred stock is senior to the common stock as toliquidation. In the event of our voluntary or involuntary dissolution, liquidationor winding up of Acusphere, holders of our preferred stock will receive aliquidation preference in an amount equal to $50 per share, plus all accruedand unpaid dividends through the distribution date. Only after holders of thepreferred stock have received their liquidation preference and any accrued andunpaid dividends will we distribute assets, if any are remaining, to our commonstock holders.

***We may be the subject of securities class action litigationdue to future stock price volatility.***

In the past, when themarket price of a stock has been volatile, holders of that stock have ofteninstituted securities class action litigation against the company that issuedthe stock. If any of our stockholders brought a lawsuit against us, we couldincur substantial costs defending the lawsuit. The lawsuit could also divertthe time and attention of our management.

42

----

 

***Future sales of common stock by our existing stockholdersmay cause our stock price to fall.***

The market price of ourcommon stock could decline as a result of sales by our existing stockholders ofshares of common stock in the market, or the perception that these sales couldoccur. These sales might also make it more difficult for us to sell equitysecurities at a time and price that we deem appropriate. As of November 8,2006, we have approximately 28,830,922 shares of common stock outstanding and730,000 shares of convertible preferred stock outstanding that are convertibleinto approximately 5.3 million shares of our common stock, plus up to a maximumof approximately 1.0 million additional shares of our common stock issuable atour option in satisfaction of the maximum dividend make-whole payment on theseshares of preferred stock. All of the shares of common stock issuable uponconversion of our preferred stock will be freely tradable without restrictionunder the federal securities laws unless purchased by our affiliates.

***The terms of our outstanding shares of preferred stock mayrestrict our ability to raise additional capital or hamper or prevent anacquisition of us.***

In February 2005, weissued and sold 900,000 shares of our 6.5% convertible exchangeable preferredstock. As of September 30, 2006, 730,000 of these shares of preferred stock areoutstanding. In the event of our voluntary or involuntary dissolution,liquidation or winding up of Acusphere, holders of our preferred stock willreceive a liquidation preference in an amount equal to $50 per share, plus allaccrued and unpaid dividends through the distribution date. Only after holdersof the preferred stock have received their liquidation preference and anyaccrued and unpaid dividends will we distribute assets, if any are remaining,to our common stock holders. Without the vote or consent of the holders of atleast a majority of the shares of preferred stock, we can not authorize or sellany equity security that ranks senior to the preferred stock as to dividends ordistributions of assets upon liquidation, dissolution or winding up ofAcusphere. As a result of this liquidation preference, it may be difficult forus to raise additional capital through the sale of common stock or juniorpreferred stock on acceptable terms, or at all.

In addition, without thevote or consent of the holders of at least a majority of the shares of preferredstock we may not effect a consolidation or merger with another entity unlessthe preferred stock that remains outstanding and its rights, privileges andpreferences are unaffected or are converted into or exchanged for preferredstock of the surviving entity having rights, preferences and limitationssubstantially similar, but no less favorable, to the convertible preferredstock. This provision could hamper a third party’s acquisition of us ordiscourage a third party from attempting to acquire control of us via a merger.

***Under some circumstances, the holders of our outstandingshares of preferred stock may be entitled to elect some of the directors ofAcusphere.***

In February 2005 weissued and sold 900,000 shares of our 6.5% convertible exchangeable preferredstock. As of September 30, 2006, 730,000 of these shares of preferred stock areoutstanding. Cumulative dividends accrue on our preferred stock at an annualrate of $3.25 per share, payable quarterly on the first day of March, June,September and December, commencing June 1, 2005. Any dividends mustbe declared by our board of directors and must come from funds that are legallyavailable for dividend payments. If we have not paid dividends on the preferredstock in an aggregate amount equal to at least six quarterly dividends whetheror not consecutive, we must increase the size of our board of directors by twoadditional directors. After this time, and for so long as these dividendsremain due and unpaid, holders of the preferred stock, voting separately as aclass with holders of preferred stock ranking on the same basis as to dividendshaving like voting rights, will be entitled to elect two additional directorsat any meeting of stockholders at which directors are to be elected. Thesedirectors will be appointed to classes on the board as determined by our boardof directors. These voting rights will terminate when we have declared andeither paid or set aside for payment all accrued and unpaid dividends. Theterms of office of all directors so elected will terminate immediately upon thetermination of these voting rights.

***Provisions of Delaware law or our charter documents coulddelay or prevent an acquisition of us, even if the acquisition would bebeneficial to our stockholders, and could make it more difficult for you tochange management.***

Provisions of Delawarelaw or our charter or by-laws could hamper a third party’s acquisition of us,or discourage a third party from attempting to acquire control of us.Stockholders who wish to participate in these transactions may not have theopportunity to do so. These provisions could also limit the price thatinvestors might be willing to pay in the future for shares of our common stock.Further, these provisions make it more difficult for stockholders to change thecomposition of our board of directors in any one year.

These provisions include:

·      a provision allowing us to issue preferred stock with rights senior to those ofthe common stock without any further vote or action by the holders of the commonstock;

43

----

 

·      the existence of a staggered board of directors in which there are threeclasses of directors serving staggered three-year terms, thus expanding thetime required to change the composition of a majority of directors andpotentially discouraging someone from making an acquisition proposal for us;·      the by-laws’ requirement that stockholders provide advance notice whennominating our directors;·      the inability of stockholders to convene a stockholders’ meeting without thechairperson of the board, the chief executive officer, the president or amajority of the board of directors first calling the meeting; and·      the application of Delaware law prohibiting us from entering into a businesscombination with the beneficial owner of 15% or more of our outstanding votingstock for a period of three years after the 15% or greater owner first reachedthat level of stock ownership, unless we meet specified criteria.

***We have never paid dividends on our common stock, and we donot anticipate paying any cash dividends on our common stock in the foreseeablefuture.***

We have paid no cashdividends on our common stock to date and, other than cash dividends paid onour preferred stock, we currently intend to retain our future earnings, if any,to fund the development and growth of our businesses. In addition, the terms ofany future debt or credit facility may preclude us from paying these dividends.As a result, capital appreciation, if any, of our common stock will be yoursole source of gain for the foreseeable future.

**ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

None

44

----

 

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

None

**ITEM5. OTHER INFORMATION**

Our policy governingtransactions in its securities by its directors, officers and employees permitsits officers, directors and certain other persons to enter into trading planscomplying with Rule 10b5-1 under the Securities Exchange Act of 1934, asamended. We have been advised that, in accordance with Rule 10b5-1 and ourpolicy governing transactions in its securities, such a plan has been enteredinto with provisions requiring that any trading of securities thereunderis to be reported when and if it occurs in accordance with applicable law.We undertake no obligation to update or revise the information provided herein,including for revision or termination of an established trading plan.

**ITEM6. EXHIBITS**
| Exhibit  Number | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                  |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Common Stock Purchase Agreement, dated  as of August 31, 2006, by and between the registrant and Azimuth  Opportunity Ltd. (incorporated herein by reference to Exhibit 10.1  to the Current  Report on Form 8-K filed by the registrant on September 1, 2006) |
|            |       |                                                                                                                                                                                                                                                                     |
| 31.1            |       | Rule 13a-14(a) / 15d-14(a) Certification                                                                                                                                                                                                                                 |
|            |       |                                                                                                                                                                                                                                                                     |
| 31.2            |       | Rule 13a-14(a) / 15d-14(a) Certification                                                                                                                                                                                                                                 |
|            |       |                                                                                                                                                                                                                                                                     |
| 32.1            |       | Section 1350 Certifications                                                                                                                                                                                                                                         |

 

45

----

 

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized on this 14th day of November 2006.

 
|          | ACUSPHERE, INC. |
|----------|-----------------|
|     |            |   |
|     | By:             | /s/ Sherri C. Oberg |   |
|     |            | Sherri C. Oberg |
|     |            | *President and Chief Executive  Officer* |
|     |            |   |
|     | By:             | /s/ John F. Thero |   |
|     |            | John F. Thero |
| * * | * *        | *Senior Vice President and Chief  Financial Officer* |
|     |            | *(Principal Financial* *and Accounting Officer and* |
|     |            | *Duly Authorized Officer)* |

 

46

----

 

**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                  |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Common Stock Purchase Agreement, dated  as of August 31, 2006, by and between the registrant and Azimuth  Opportunity Ltd. (incorporated herein by reference to Exhibit 10.1  to the Current  Report on Form 8-K filed by the registrant on September 1, 2006) |
|            |       |                                                                                                                                                                                                                                                                     |
| 31.1            |       | Rule 13a-14(a) / 15d-14(a) Certification                                                                                                                                                                                                                                 |
|            |       |                                                                                                                                                                                                                                                                     |
| 31.2            |       | Rule 13a-14(a) / 15d-14(a) Certification                                                                                                                                                                                                                                 |
|            |       |                                                                                                                                                                                                                                                                     |
| 32.1            |       | Section 1350 Certifications                                                                                                                                                                                                                                         |

 

47

----